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Acknowledgment: During the first years of my professional

career I had the pleasure of working with many excellent


professionals at Arthur Andersen. It is because of their hard
work and dedication of advancing knowledge that this
document was prepared. So I feel it is somewhat ashamed to
see this document go to waste. Therefore, I have decided to
make it available for students enrolled in Module 2 of my
Excellence in Financial Management Program. This document
is made possible by the folks at Arthur Andersen and I do not
take any credit for this Strategy Toolkit. Matt H. Evans

Strategy Toolkit
Foreword

Welcome to Version 1.0 of Strategy and Organisations Strategy Toolkit.

Good strategy is based upon structured thinking. Subsequent action based upon that strategy is
dependent upon the clear communication of your structured thinking. Accordingly, this booklet has
been put together to help support you in structuring and communicating your thoughts as you help
clients address their (often complex and ill-defined) problems.

Hopefully this booklet will:


act as a reminder (or an introduction) to a range of useful structuring tools;
give a clear description of each tool and indicate where it may be most fruitfully employed;
highlight some of the short-cuts (and pitfalls) when using those tools;
provide a best practice example which can be adapted to your own situation; and
suggest experienced practioners within ABC who may be able to help you further

The aims of the toolkit are simple:


to increase the quality and insightfulness of the work we do for our clients;
to improve our efficiency by avoiding reinvention of standard tools;
to support ongoing training programmes;
to create an ongoing store of intellectual capital; and
to help communicate with all our colleagues in Andersen, helping them understand what
we do

Perhaps the biggest intellectual challenge in compiling this booklet was defining what we mean by a
tool. I am not convinced this issue has been fully solved, and you may discern three types of
construct:
widely accepted strategy consulting tools (e.g. growth share matrix);
approaches to particular types of issue which are less prescriptive; and
presentational devices, applicable to many situations
All, however, should support you in generating strategic insight for your client.

This booklet is intended to be your back-pocket guide to the tools most commonly used on strategy
projects. It does not claim to be exhaustive or even comprehensive. However, you will find over 50
tools on the following pages, each one selected for its usefulness and general applicability to the
types of client engagements we work on. I am sure that some of your favorites will be missing but
this is only version one and the toolkit will evolve through time. It is intended that this booklet will be
updated regularly and your input is most welcome.

We believe that development of this Strategy Toolkit is an essential element in building a world-class
strategy practice within Andersen. However, it is not a substitute for hard work and creative thinking,
so do not limit yourself to the tools in this book.

Finally, some acknowledgments. This toolkit is not the first to be produced by the practice. It draws
heavily on previous versions, whose authors I would like to thank. I am also very grateful to those of
you who have submitted best practice examples and suggested entries keep them coming.
Table of contents
Strategy at Andersen ...................................................................................................... 5
An indicative guide to using the tools .............................................................................. 6
Data sources................................................................................................................... 7
100% bars....................................................................................................................... 8
Activity maps................................................................................................................... 10
Answer first hypothesis ................................................................................................... 12
Asset extension modelling............................................................................................... 14
Business definition .......................................................................................................... 16
Capability assessment .................................................................................................... 18
Competitor analysis template .......................................................................................... 20
Conversion waterfall........................................................................................................ 22
Customer experience analysis ........................................................................................ 24
Customer segmentation .................................................................................................. 26
Customer segmentation analysis .................................................................................... 28
Dupont analysis .............................................................................................................. 30
Economies of scale ......................................................................................................... 32
Executive dashboard....................................................................................................... 34
Forecasting techniques ................................................................................................... 36
Free cash flow diagram ................................................................................................... 38
Gantt charts .................................................................................................................... 40
Growth share matrix........................................................................................................ 42
Growth spread matrix...................................................................................................... 44
KPC comb charts ............................................................................................................ 46
Marimekko charts............................................................................................................ 48
Market definition ............................................................................................................. 50
Market entry and exit....................................................................................................... 52
Market sizing................................................................................................................... 54
Model front panel ............................................................................................................ 56
Parfait charts................................................................................................................... 58
Partnering maps.............................................................................................................. 60
PEST analysis................................................................................................................. 62
Porters five forces .......................................................................................................... 64
Portfolio matrix ................................................................................................................ 66
Prioritisation funnel.......................................................................................................... 68
RACI analysis ................................................................................................................. 70
Reverse costing .............................................................................................................. 72
Risk matrix ...................................................................................................................... 74
RONA charts................................................................................................................... 76
Root cause analysis ........................................................................................................ 78
ROS/RMS ....................................................................................................................... 80
Scatter graphs................................................................................................................. 82
Scenario development .................................................................................................... 84
Sector charts................................................................................................................... 86
Sensitivity charts ............................................................................................................. 88
Shareholder value analysis ............................................................................................. 90
Share momentum charts ................................................................................................. 92
Sources of value waterfall ............................................................................................... 94
Strategy articulation map ................................................................................................ 96
SWOT analysis ............................................................................................................... 98
Traffic light charts............................................................................................................ 100
Value chain analysis ....................................................................................................... 102
Value disciplines ............................................................................................................ 104
Weighted column chart ................................................................................................... 106
Feedback form ................................................................................................................ 108
An indicative guide to using the tools
Strategic intent Strategic architecture Strategic change
100% bars
Activity maps
Answer first hypothesis
Asset extension modelling
Business definition
Capability assessment
Competitor analysis template
Conversion waterfall
Customer experience analysis
Customer segmentation
Customer segmentation analysis
Dupont analysis
Economies of scale
Executive dashboard
Forecasting techniques
Free cash flow diagram
Gantt charts
Growth share matrix
Growth spread matrix
KPC comb charts
Marimekko charts
Market definition
Market entry and exit
Market sizing
Model front panel
Parfait charts
Partnering maps
PEST analysis
Porters five forces
Portfolio matrix
Prioritisation funnel
RACI analysis
Reverse costing
Risk matrix
RONA charts
Root cause analysis
ROS/RMS
Scatter graphs
Scenario development
Sector charts
Sensitivity charts
Shareholder value analysis
Share momentum charts
Sources of value waterfall
Strategy articulation map
SWOT analysis
Traffic light charts
Value chain analysis
Value disciplines
Weighted column chart

4
100% bars

Description The 100% bar is a powerful and flexible presentation tool for
highlighting the relative proportion of elements within a fixed total.

Typical 100% bars work effectively for many purposes, such as:
application - comparing competitors within an industry or market by
sales, market share, geography, product type etc.
- costs that go into the manufacture of a particular product;
- key elements that comprise a companys revenue streams
- addressing changes over time etc.

This enables people to easily recognize the relative impact of


different factors that go into a process or trend.

In particular, placing a series of 100% bars in order can highlight


changing patterns in relative terms, over time, region or any other
segmentation. 100% bars do not reflect changes in the absolute
size of the category in question.

Typical Excel has an option to create 100% bars as part of its Chart Wizard,
process so they are easy to create.

Gather the data appropriate to the particular application you are


using the 100% bars for, from expert interviews, analyst and
brokers reports and, if necessary, client interviews.

Ensure that you are happy with the data you have gathered and
that, if you are creating a series of bars, the information refers to the
same type of data.

Annotate the chart and draw conclusions from it.

Unless you are dealing with many categories, it is best to put the
absolute size of each item at the end of the bar.

For comparisons between bars over time, clearly mark the CAGR
for each of the key elements of the bar.

5
Example Concentration of Customer Profitability
output 7m 17m
100%
A
% of
Total B
80%
C
60% 40% of
customers
generate 90%
40% of profit
D
20%

0%
Customer ranked Net profit
by profitability
Source: RBS presentation, Feb 2001

Wealth by Source Region

$7.2tr $16.6tr $17.4tr $23.1tr


100%
Africa
% of 80% Middle East
Total S. America
60%
Asia

40%
N. America

20%

Europe
0%

1986 1996 1997 2000


Source: Private Wealth Management, 1998/99

Tricks Use shading to highlight key messages you wish to show to the client.
and tips
100% bars are often interchangeable with (or augmentations of)
Mekkos and Parfait diagrams.

6
Activity maps

Description An activity map is an easy, visual summary of a company or series of


companies and what they do.

Typical Activity maps are a good way of moving from a broad overview of a
application particular company or industrys activities to a detailed and
comprehensive list of all activities within the value chain.

They are designed more to spark discussion than provide an answer


to a particular problem, but make good slides for a presentation or a
client pack.

You can use the activities collated in a number of ways to stimulate


thought about the company in question. Try:
- Mapping company activities against competitors and
discussing differences;
- Shading boxes according to relative capability; and
- Shading boxes according to desired state and noting
discrepancies with as is

It is surprisingly difficult to develop activity maps. Take time over the


Typical process and make sure you dont miss out important activities.
process
Start by drawing the value chain in which the client operates,
vertically on the left side of your slide.

Taking each element of the value chain in turn, try and record all the
sub-activities necessary that comprise the element as a whole.

Place each activity in a box to the right of the value chain.

This exercise can be completed with a client, but if not try and
discuss it with a client afterwards to ensure you have captured all
activities .

7
Example High-level activity map for fixed line telecoms: Now and Future
output
Media/ Publishing Corporate Advertising Communications

Content News Films/ Music Games Publishing Information Transactions Rich Interactiv Voice E-mail Video Exhibition
Production Programming Media e conference
User Applications Middleware ASP

Content Search BrowsersE-comm. Appn Enterprise Content- Web Traditional Netwk Strmg Cachg Metrg BIlling Fixed W-ASP ASPE
Provision engines tools hosting tools appns specific sites offline mgmt media ASP
apps media
Portal Mobile
Customer management

Portal Portal
Open Walled Open Walled
Garden Garden
Internet
Access Fixed Mobile Hosting
Provision
ISP ISP
Backbone Network Provision Network Equipment and Infrastructure
Network
National Internl Bandwth Colocn/ Switching/ Fibre Co-ax Copper Switches Multiplexer Sat. Mwave Rights of
Backbone Backbone Trading Hotelling routing and Routers s Way
Local Access
Fixed Network Services Fixed Netwk Eqpmt Infrastructure Mobile

Dial-up PSTN/ ISDN HSI Cable Data xDSL Radio Co-ax Fibre 2G 2.5G 3G GPRS
Local
Equipment Devices Applicatio
ns
Fixed Mobile PDAs TVs SpecialistSet top Operatin Local Specialist
Handsets Handsets Devices box g Middleware Local Apps
Systems
Key areas of future
Current area of activity activity - owned or as
part of an alliance
Source: TMC example
Tricks Note: the above example is not to scale (was originally the size of a
and tips powerpoint slide). To present this much data in a client situation,
ensure that all boxes are clear and well spaced.

You can shade boxes according to competency or desired


competency if you wish to draw out key messages.

Overlaying current with desired activities helps clarify key conclusions


in advance of alliance, M&A activities, etc.

Consider adding rows for parameters which fall outside the value
chain, but which can help distinguish competitors, e.g. geography,
customers.

8
Answer first hypothesis

Description The hypothesis or logic tree is a key method of thinking used on


strategy projects. It provides a framework for a piece of research
or analysis to ensure that all factors are suitably accounted for
and evaluated, and allows you to apply principles of structured
thinking to simplify complex problems.

Structured thinking is a key method for approaching - and


hopefully answering - a question in a compelling way. It helps you
to be clear about the key issues you are tackling, to remember the
information you have uncovered and to structure the solution you
propose.

Typical The hypothesis tree should be used early on in a project, once a


application basic understanding of the issues has been established. It should
be returned to and changed as your thinking develops.

The hypothesis tree can be translated directly into a research tree


to structure the activities that need to be performed. Once the key
questions have been established it is usually clear which research
method is the most appropriate.

Typical The process of creating a hypothesis tree is ideally completed by


process one person first, then discussed with the team - hypothesis trees
cannot be written by committee.

Begin by formally stating the situation your client is in. Then write
down the key complication. In other words, define your clients
problem.

This should lead to a question which will point you towards your
trees hypothesis or answer. Write this at the top of the tree as
a positive statement which directly answers the clients question.

Create sub-branches by splitting the top of the tree into its natural
components (this takes practice). Each horizontal level should
contain statements of a distinct category or type; vertically, the
ideas should support each other.

9
The sub-branches should obey the MECE principle (Mutually
Exclusive Completely Exhaustive). This implies that:
- if one of the sub-branches is false then the top of the tree must
be false
- if all the sub-branches are true then the top of the tree must be
true

Discuss the tree with your team as an initial test of logic and
completeness, and change if it is required. Once the tree is
developed sufficiently, each question should be possible to address
in a manageable way. Take each element of the tree and formulate
an appropriate match in the research tree to satisfy the question

Example BankCo. Loyalty Scheme Redesign


output The proposed changes to the loyalty scheme will generate significant profit uplift
but will not have the desired impact if the changes are incremental

Will generate profit uplift Incremental changes wont work

Can change Declining Poor Rewards do


Cost reductions customer not solicit
customer behavior market
can be made relnship and required
position
targeting behaviors

Can increase Can reduce Can reallocate Can save mis-


Can improve Can manage Can convert Can create new
contribution costs for balance sheet targeted
customer out poor more prospects revenue
from best sourcing of costs marketing
behaviors customers streams
customers goods beneficially spend
Can identify Can identify Can identify Can identify good Can increase Sourcing costs are Can legally Posted
profitable borrowers, poor customers prospects share of wallet higher than industry change materials can
customers and make Can price them Can design Can increase x- Can offer high value provision be reduced
Can retain them them borrow out profitably attractive CVPs sales goods selectively position Process
longer more Can manage Can win converts Can partner Swap high for low Others have inefficiencies
Can increase x- attrition from competition profitably value rewards lower can be reduced
sales provisions
Can reduce LLP
Source: Example

Tricks A positive statement, although more difficult to express, is more


and tips valuable in developing a proof.

Express assertions in complete sentences rather than in note form as


they better assist clear thinking.

Some first level splits of the hypothesis tree occur rather regularly.
Typical first level branches are:
- Sales, margins and costs; and
- Customers, competitors and costs

10
Asset extension modelling

Description Asset extension modeling is a simple too (or technique) for


identifying new business opportunities, based upon a companys
existing strategic assets.

It is all too common in the new economy to define potential


business opportunities which are simply not realizable given the
starting position of a particular company. This techniques avoids
those pitfalls by isolating core, near and far opportunities based on
the structuring of existing assets such as brand, market reach,
capital, IP, etc.

By defining the distance of a business opportunity it is much


more likely that you will identify the likelihood of achieving stretch
opportunities without straying into the realms of fantasy.

Typical Typical applications for asset extension modeling might include:


application - e-commerce brainstorming;
- identifying regeneration targets;
- skills gap analysis;
- re-engineering; and
- portfolio investment planning and divestment analysis
Typical Complete a skills audit, ensuring that all asset classes are
process captured (from soft assets through to hard assets). Typical asset
classes might include: free cash, debt availability, skills, scale of
workforce, IP (knowledge, patents), customer base, products,
brand, access to industry influences, etc.

Rank the strength of each assets, and then cluster into 2-6 groups.

One or two teams members should then develop an asset


extension map, which can then be tested internally with the rest of
the project team. Run this past the primary client contact and
incorporate his or her feedback.

Plan and organize a workshop, paying specific attention to the


stretch questions you will ask.

During the workshop, treat the exercise like a brainstorming


session, but keep drawing the threads back to the defining assets.

Conclude the workshop by gaining agreement on which


opportunities are most likely to be successful.

11
Example
Asset Extension Modeling
output
Skills extension Far satellite Brand extension
Internet
Internet On-line
Private
B-B derivatives wealth
Bank
integration Internet management management
services derivatives and settlement tools
management Near satellite
and settlement Mobile
Institutional Operational research Gold and
Operational Institutional fixed risk on-line provision jewellery
risk on-line investor trading income advisor trading
advisor and risk transaction
management platform
hub Mobile
XML Open credit
derivatives architecture Core derivatives Mobile
trading ECN for US bond
platform equities syndication
Open Internet tool
architecture Private
Mobile ECN for UK Bank Interest rate
credit equities derivative
derivatives network
XML Institutional
derivatives fixed
trading income Forex portal
platform transaction
platform
Market extension Product extension

Source: April 2001

Tricks Dont let suggestions in the far satellite region get too far away from
and tips reality. But balance this against the need for individuals to test their
creativity.

Use extension modelling alongside scenario planning, beachhead


mapping, etc.

12
Business definition

Description A framework to help clients understand how they might best


manage their business as unified or separated entities. It also
forms a basis for identifying new business opportunities and for
estimating the potential of markets.

Business definition is based on the logic that shared customers


plus shared costs constitutes a single business. Alternatively, if a
business shares neither customers or costs they are distinct.

This has significant implications on how to structure businesses in


a manner which can leverage scale and reach customers to
maximize cross selling and minimize channel costs.

Typical There are many uses for business definition, but key applications
application include:
- establishing the boundaries of new e-business;
- deciding how to manage a portfolio of opportunities;
- as a basis for market entry studies;
- to support new business start-ups; and
- value proposition development

Typical Begin by getting a contextual understanding through background


process reading.

Use this knowledge to identify discrete business activities in the


area your client is working (as is). For example, food manufacture,
pet food brand management, wheat milling, food distribution (US),
food distribution (France).

Determine the cost structure (i.e. the key components) for each
activity. Use the 80:20 approach, but dig down as quickly as
possible into existing management accounts.

Plot 100% bars for costs against each other, and identify through
shading where cost sharing occurs (or could occur).

Map the channel processes at a high level, which serve the


customers for each business activity.

Plot this as a value chain, each against the others and identify
areas of channel/customer sharing.

Plot each business activity on the cost sharing vs. customer


sharing matrix.

13
Use this to draw out implications regarding which businesses can
be:
- stand alone or unified;
- leveraged off each others distribution or cost base; and
- better cross-sold between sets of customers.

Example Business Definition Framework


output
100%

Single business
(with niche potential)

Single business

Distinct business
(with cost leadership
Cost sharing

potential)

50%

Distinct Single
businesses business
Distinct businesses (with channel (with
sharing substitution
potential) potential)

0%
0% 50% 100%
Customer sharing
Source: Example
Tricks
Read examples of how new entrants have managed to get a foothold in
and tips new industries, and determine what elements of their existing business
they have leveraged. For example, Virgins brand extension activities,
or Japanese cost sharing in the motorcycle and engine manufacturing
business).

Assignments of this sort can be helped greatly by Global Corporate


Finances knowledge of best owners for discrete businesses. Dont
assume your client is the best owner of its existing business portfolio.

14
Capability assessment

Description Capability assessment encompasses a number of tools designed to


focus a client on specific skills that the client or competitors
company may have or lack, and that therefore may act as a basis for
a sustained source of competitive advantage.
Typical Capability assessment is an important activity for isolating and
application ranking capabilities in a particular company, business unit or
department. It can be used either to rank capabilities as seen within
a company, or as perceived by customers or clients externally.

By using tools such as the spider chart in displaying the results,


characteristic patterns can be isolated, and the cumulative impact of
over- or underperformance in a number of fields can be highlighted.

See also: Value disciplines

Typical Determine the key capabilities you wish to assess the company by.
process These may be the three core capabilities from the value disciplines
model, or other categories (agreed with the client in advance), indeed
almost anything that can be broadly termed a capability. This might
include:
- superior skills in producing high quality products;
- superior system for delivering customer orders accurately
and swiftly;
- better after-sale service capability;
- more skill in achieving low operating costs;
- unique formula for selecting good retail locations;
- unusual innovativeness in developing new products;
- better merchandising and product display skills; and
- superior mastery of an important technology

Conduct a comprehensive survey of a predetermined target audience


(customers, employees, etc.) based on ranking each capability.
Average the results for each category to get a single score for each
capability.

Plot the results of the survey on a spider chart so that each capability
runs along its own axis. Join the points on each axis together to form
a complete shape.

You may wish to shade the area enclosed by the lines to indicate a
rough overall performance.

Annotate your results carefully so as to highlight the conclusions you


have drawn.
15
There are many other ways to present the information in an
informative way - take the so-called wheel of fortune (below).
Strategic fit with ML
Example 4

output Rapid
implementabili
3 Success of EXN

ty 2

0 Leveraging of
EXN
relationships

Enhancing fund Industry leadership


management
infrastructure
Industry collaboration EXN
1- low importance BW
4- high importance
Source: FSI Project, April 2001
Assets

Cash generating activities


Financially strong negotiating position
Operating in a growth industry

on
Fina

isati
optimsset
Experienced and stable workforce

ncia
t s

A
Attractive, captive, guaranteed footfall Hu
m se on
As rati
l
an
High quality customer segmentation data e
op
Airports and lots of space
Phy s
ica l Customer
On airport infrastructure e.g. roads and utilities operations
Location (proximity to capital and entrance to EU)
Regu
d la
Very strong airport brands @ Heathrow and Gatwick Bran politi tion &
c al
BAA brand is fairly anonymous C
M om
ar m
Good track record of management and investments re ke e
ltu tin rci
on

Cu g al
Supp
utati

Generally risk adverse &


ort
Rep

Realistic
Looking at the long term
Professional
Responsible
Safe
Source: Client project, May 2001

Tricks Be aware that selecting capabilities and subjectively ranking them


and tips can produce results that are very sensitive for the client and/or
generate certain levels of disagreement. Also, take care when
reproducing diagrams in final packs as they tend to divert attention
and/or cause disagreement.

Remember when conducting a customer survey to be aware of the


impact of your sample size, the types of questions you ask and the
unrealistic environment of the survey. Also, make sure to ask open
questions so you can provide qualitative evidence to support or bring
out your conclusions.

Inherently relative, spider charts usually work best when a series of


different results are compared. For example, ask customers to rank
not only the company but competitors; or compare the results of
internal surveys between departments.
16
Competitor analysis template

Description A template which aids direct comparison between industry


competitors, based around strategically important differentiating
factors. This template is not uniform, but is typically structured.

Typical Wherever a rigorous comparison between market players has to


application be made.

To address a companys structure, strategic conduct and


performance.

There is no magic to this particular template, but something


similar should be employee in order to avoid uncomparative or
non-focused analysis.
Typical
Review the hypothesis for your current client assignment and
process agree the key parameters which capture the behaviors of each
competitor related to your specific issue.

Try the template on one or two competitors. Then simplify and


modify it on the back of the experiences you find.

Feed the information into the strategic decision making steps in


the assignment.

Tricks If you cannot fit all of your summary onto a single page you have
and tips not understood the issue or the competitor well enough. Revise.

17
18
output
Example

Structure Conduct Performance


Mission - To provide customers with the most Acquisitions - Investment /HNW focus Profitability - Reliance on mass affluent market
useful and ethical financial services in the world Research group Chicago Investment Analytics Charles Schwab has experienced significant net
(Nov 2000) income growth (5 year CAGR of 33%). However, the
Strapline: Creating a world of smarter investors Investment management group US Trust for recent downturn
$2.9 Bn (June 2000) to tap wealthy investors in online trading
Philosophy
High tech, high touch purveyor of investment advice and private has impacted
Technology leadership banking services to some of America's richest Charles Schwab
A culture of innovation families (More than $5 Mn investable). Will retain more than other
their separate brands online brokers
Organisation eTrading technology and brokerage CyBerCorp because of their
24,300 employees (Feb 2000) (Provides internet based services to greater focus on
highly active online investors) affluent customers, as opposed to active traders
Resource Trust Company HNW bank. (Feb 2001)
Products
Requires clients to have $3 million of investable Value creation
Retail services International businesses assets

415 branches, electronic Latin American center Alliances - Extending the distribution network
brokerage Charles Schwab Europe
Charles Schwab Hong
Multi-year alliance with AOL to become the
3,000 funds, 32 proprietary premier financial services company and
Kong Ltd
Schwab funds
Charles Schwab Tokyo brokerage firm across AOLs personal channels
Investment tracking
Stock quotes Marine Co (Oct 2000)
Charles Schwab Canada Teamed with Ericsson to develop mobile
Trade orders
Asia Pacific Services center investing products (June 2000) Customer assets - new broking customers and
Asset allocation
Research Alliance with the 3 major wireless carriers (Nov customers attracted from others
2000)
Schwab Schwab Capital Markets Charles Schwab attracted self-directed customers
Retirement Plan Institutional & Trading Marketing - Customising the product offering from traditional
Services
full-service
Investment Operational Trade execution Lower pricing for customers with higher asset
advice to retired
brokerages and
support, trading Trading, research bases or trading volumes
and technology customers
Services to plan and support Looking to expand offering to provide private
administrators solutions for new to broking
services for banking services for affluent customers and 7.5 Mn active accounts,
independent fee- institutional clients
TrustMark access to leading edge technology for active $872 Bn customer assets
compensated
services Customised traders. (2000)
investment
advisors services for HNW Other new products include Gift Package for new
customers investors (June 2000);and Womens financial site
(Oct 2000)

Source: UBS, March 2001


Conversion waterfall

Description The conversion waterfall is a tool that helps identify areas of relative
competitive weakness and strength, whether between internal factors
(e.g. different locations or products) or relative to competitors. The
waterfall is a simple way of representing the findings of a customer
interview programme targeting six major measures.

The conversion waterfall illustrates the attitude and/or behaviour


patterns of a companys customer base. It provides insight into
where a company is losing or gaining customer interest.

By focusing attention towards the strongest relationships, conversion


waterfalls can be used to direct a companys efforts into retaining
customers.

See also: Customer Segmentation, Customer Lifecycle

Typical Understanding customer behaviour is a very important part of


application strategic business analysis. By examining customer attitudes and
behaviour, a business can identify where their strengths and
weaknesses lie and begin filling the competitive gap or maximising a
competitive opportunity.

Typical Begin by carefully planning your activities. This includes defining the
process hypothesis to be tested in your interview programme, and
determining the interview target population. When setting up the
interview programme, ensure the sample size is large enough. As a
rule of thumb, interview more than 30 customers.

Design your questions to ensure you answer the questions required


for the planned output, and include redundancy to check customer
consistency.

Clearly define each category in the interview plan/questionnaire. If


you dont understand the differences between the factors you are
evaluating, the customer never will.

Where possible conduct research in more than one market. A


variance of results may just show cultural differences, but in some
cases it might give an insight into the way different markets operate.

Spend some time thinking about the results. Average the


quantifiable scores, then seek to explain through reference to what
you know of an organization's brand, image, store, location or
product feature.

19
Apply the results with intelligence and consider accompanying the
chart with qualitative comments gathered in the interview process to
flesh out your conclusions.

Clients can take different messages from the results of this analysis.
They may wish to refocus their efforts on areas of weakness; or they
could change the messages they are taking to market so that their
stronger performance is recognized.
Example % of population
Conversion waterfall, combine harvesters, 2001
output
100%

90%
New Holland

80% Competitor

70%

60%

50%

40%

30%

20%

10%

0%

Awareness Knowledge Liking Preference Tested Purchase

Source: TMC Project, March 2001

Tricks It is possible to show a repurchase column, representing the number


and tips of customers that return. This is a key output of customer
satisfaction as customer acquisition costs in some industry sectors
are enormous, so assessment of repurchase across segments is
critical to understanding customer dynamics.

Make sure you identify customer segments and then target your
interview programme at the most important segments. It is very
important to get the segmentation process right first, as otherwise
valuable differences may be obscured during averaging.

20
Customer experience analysis

Description Customer Experience Analysis is a mechanism for identifying the


critical decisions, events and actions a customer undertakes during
the full purchase process. It helps identify the customer contact
points and the key criteria for success at each one. This analysis is
sometimes labeled Customer Value Exchange.

Typical Useful for any company which has to compete for and retain
application customers (i.e. all of them). The concept is easily extendable to
employees (internal customers), suppliers, partners and other
shareholders.
Improving customer profitability is only possible if you change the
customers behavior (e.g. buy more, use lower cost channels,
recommend to friends etc.) Measuring customer behaviour at every
interaction point with the company allows you to advise on where
your client must invest (i.e. change things) in order to bridge the gap
between customer expectations and delivery against them.
Many other tools can contribute to this analysis, including CVP
definition, root cause analysis, customer satisfaction surveys, product
prioritisation, financial return modeling, customer segmentation etc.
Typical The full process for undertaking this analysis can be extremely
Process comprehensive. Below is described a number key steps which are
typically undertaken.
- define and agree customer segments (need-based)
- develop insight into customer behaviours (e.g. understand
customer promise, rank needs, define perception gap etc.)
- develop hypothesis of how to fill gap and estimate $potential

- identify all customer contact points (high level, then detailed)


- develop detailed gap analysis at each contact point using
existing client and public domain data, interviews etc.
- prioritise areas for investment which will solicit maximum change

- determine root cause


- financially model benefit returns

- design processes for achieving changes in customer behaviour


- develop transition plan and measuring/monitoring system
Clearly, the full end-to-end analysis requires multiple tools and
techniques, but the fundamental framework of identifying and
prioritising customer contact points can be very powerful.

21
Example
Key contact features identified for a UK insurance company

output
Progress monitoring
Consume
Consume One point of contact
On time transaction Telephone problem solutions
completion
Effective problem
handling Evaluate
Evaluate Deliver
Deliver Service
Service
Follow up contact
Quality of service and staff
Ease of access to service
and efficiency
Payment alternatives Accommodation of
Account set up customer requirements
No additional charges Pay
Pay
Purchase
Purchase Order taking process and
No billing enquiries documentation
required
Product/Service quality
Sales Consultant recommendation
Detailed
Detailed Price, delivery times
selection
selection Additional services (e.g. all in one
provider)
Search
Search for
for Ease of access/convenience
Interest alternatives
alternatives Repurchase
Repurchase
Interest
Awareness
Awareness
Access to Recommend
Recommend
Service financial advice Service provision satisfies
Financial advice requirement customers expectations
Price differences
Advertising and identified Performance confidence
Promotional
Media Ease of contact for Customer - supplier
Personal materials
enquiry Overview of relationship
Recommendation Initial contact Quality of problem
products, services
enquiry and options resolution
Marketing material

Source: FSI project, 1998

Tricks & This is very difficult to sell to a client as an end-to-end solution. It


Tips needs to be broken down into its sub-elements.
Use a value chain to help build the initial high level customer
interaction points.
One way to identify how value may be generated from changing
customer behaviours is to use a customer contact point matrix.
Create a comprehensive list of all customer contact point (list
vertically), then list all the profit impacting behaviours you desire of a
customer (list horizontally). Use traffic lights to indicate high-
medium-low impact.
Typical sorts of changes to behaviour you might look out for are: buy
more, buy more frequently, buy more categories, submit business,
close business, recommend to friends, use cheaper channels, buy
higher margin products etc.

22
Customer segmentation

Description The key to operating successfully in a competitive market is


understanding customers needs, values and behaviors and being
able to take action. Segmentation identifies groups of customers
with homogeneous needs, who can be served by a tailored
proposition.
Typical
process From what you know about the clients customer database, industry
analysis, client or expert interviews, and focus groups, begin by
developing a number of hypotheses about likely segmentation
schema.

Segmentation seeks to group customers according to similar


purchase behaviors, attitudes and profiles. The outputs of a
segmentation schema must be:
- identifiable/recognizable: you must be able to identify which
segment a customer is likely to be in so that marketing
programmes can be actioned;
- actionable: you must present strategic options for each
segment which are achievable;
- measurable: it must be possible to measure segments by key
dimensions and assess them for market potential; and
- stable: there must be an assessment of a segments short,
medium and long term viability. Segments rarely remain the
same over time

When you are happy with your hypotheses develop a questionnaire


to test them/validate them. Keep the questioning as short as
possible and only focus on the things you really need to know. Pilot
the questionnaire with a small group of customers to test that it
works.

The sample size for the actual programme should be a minimum of


50 to be useful, or 30 per customer segment identified. This can be
a large task and it may be more economical to subcontract the work
out.

Analyze your results. Perform factor analysis to group customers


and identify trends and similar responses, and be prepared to re-
formulate your hypotheses if necessary.

Look at the groups to identify the characteristics that can be used to


describe them and their purchasing criteria, remembering the
objective is to identify a MINIMAL number of groupings.

Draw out the implications of your findings as they may require the
23 client to readdress its marketing strategy and/or business model.
Remember that the purpose of segmentation is to identify attractive
customer segments. Defining what is meant by attractive is key and
depends upon the clients business objectives, for example;
- customers who are currently highly profitable;
- customers with high lifetime (future) value; and
- large customer segments who, whilst might not be hugely
profitable, support business development into other more
profitable segments.
Example
Irregular
output x
x
x Visitors
x x x
x Event
x goers
x
x
Risk
x averse
x x
x Meeting
x xgoers x
Shoppers x x (business)
x x
x
x x
x
x Vulnerable
x x people /
Commuters careers (1)
x
x x
Regular
Note: size of bubble represents the approximate size of potential segment
1: Bubble size representative only

Source: Client project, Aug 2000

Tricks The clients views of the existence of customer segments, their


and tips characteristics and attractiveness are often based on opinion and not
fact and should be viewed with caution.

Segments do not need to include all customer data points. There will
be some outliers. If outliers look significant or interesting then
conduct further research to understand whether they are significant.

24
Customer segmentation analysis

Description Customer segmentation is the subdivision of a market into discrete


customer groups that share similar characteristics.

Any product or service potentially appeals to a universal audience.


In reality, a company will sell to only a small segment of the
population, and may derive value from a sub-segment of that.

Typical Customer segmentation can be a powerful means to identify unmet


application customer needs. It allows you determine a clients customer base
and its characteristics in a meaningful way, splitting customers up
into groups and ultimately making operational decisions about the
allocation of resources for such activities as product development,
marketing, selling methods, distribution strategies and pricing.

This allows a company to compete only where it is strong and likely


to prosper. For example, companies that identify underserved
segments can achieve a leadership position by being the first to
serve them. Customer segmentation is most effective when a
company tailors offerings to segments that are the most profitable
and targets them where the company has a distinct competitive
advantage.
Typical
process Divide the market into meaningful and measurable segments
according to customers needs, their past behaviors or their
demographic profiles.

In many ways, this is the most difficult part of the process.


Determining the most insightful segmentation variables can be done
through research, customer surveys, or focus groups (see customer
segmentation section for details).

Determine the attractiveness of each segment by analyzing, for


example, the revenue and cost impacts of serving each segment or
client retention rates.

Use shading and annotation to draw out the key market segments
the company should be targeting.

Try and identify ways the client can invest resources to tailor the
product, service or its marketing or distribution programmes to match
the needs of the key target segments.

25
Ultimately, this should allow you to develop a performance
measurement programme. This should assess ROI and be flexible
enough to adjust over time as market conditions change.
Example Loyalty Segmentation for US Bank
output 95
Retired
Retention savers
100m
(%)
90 Mid-
Affluent Lifetime
NPV

85

4.8%
80
Mid-
Wealthy Young
75 Affluent
Students Young
Wealthy

70
100 150 200 250 300 350 400 450
Customer annual contribution ($)

Source: Example

Tricks The most important thing for segmentation analysis is ensuring that
and tips the categories you define are meaningful for the exercise you are
participating in. The easiest segments to identify - age, region, and
so on - are often the least indicative ways of dividing a group of
people for a company hoping to achieve a particular objective. Base
all segmentation on hard, data-based analysis, not gut-feelings.

One of the most difficult lessons of customer segmentation,


particularly for the client, can be finding out which customers not to
sell to.

Types of segmentation and their applications

Identify Create
Priorities Develop market
customer Reach
targets CVP position
needs

Segment by:
Economic value
Demographics
Purchase
behaviors
Usage behaviors
Channel
Attitude

low relevance high relevance

26
Dupont analysis

Description Dupont analysis is the creation of a series of financial ratios designed


to quickly indicate a companys health so that senior staff can
manage the business for sustainable growth.

Typical Any decision that influences product prices, unit costs, volume or
efficiency impacts the profit margin or turnover ratio. Understanding
application
how these linkages work is the key to operating a company
successfully and extracting maximum value from capital.
Pioneered by the Dupont company, these ratios are designed to
provide a comprehensive summary of performance of a particular
company. The ratios are simple to calculate, each links closely to a
separate business function (for example, marketing). This helps to
demonstrate the relationships between otherwise disparate business
units.

Typical The process to be followed is highly dependent upon the particular


process issue you are addressing for your client. However, some general
guidelines apply:
- use both published a data and your own market/performance
analysis as inputs to the Dupont analysis (e.g. Management
accounts, analyst reports, annual reports etc.)
- agree with your team and client the definitions of each ratio -
these do vary
- calculate the ratios from your research data
- think about your audience, then create a presentation which
addresses their particular hot buttons (e.g. lenders are more
interested in liquidity and leverage; managers care about
profitability; shareholders care about ROE)
As a strategist you should not stop at this point. This is where the
insight begins:
- try to understand the drivers of financial performance. This
can be informed by other strategic analyses (such as Porters
five forces, which have direct bearing on sales volume,
margins, unit costs etc. that impact the PAT ratios)
- question which measure is critical for your client. For example,
is ROE really most critical for a new entrant into a market or
would market share alone
- highlight potential trade-offs between financial and operational
decisions to best manage organic growth
If appropriate to your task, design performance measurement
systems that reflect the critical Dupont ratios favorably

27
Dupont Analysis Framework 1
Example
output
Sales Assets Debt + Equity PAT - dividend
PAT
X X X X
Sales Assets Debt + Equity Equity PAT

Margin Asset turnover Capital leverage Equity leverage Retention ratio


(Marketing (Production efficiency)
efficiency)

ROA (operating efficiency)


ROC (capital efficiency)

ROE (equity efficiency)

Equity growth rate (sustainable growth)

Dupont Analysis Framework 2


ROC

profit capital
employed

exceptional revenue costs fixed working


assets capital

price volume unit fixed fixed stock debtors creditors


cost costs assets

market market market


share size growth

industry suppliers buyers substitutes potential


competitors entrants

Tricks
Dupont analysis works best with easy to quantify and measure,
and tips finance based, statistics. Unlike much of strategic work, the
introduction of estimates weakens the analysis.
Remember: ratio analysis does not give answers; it helps you ask
the right questions.

28
Economies of scale

Description Drawing a scale curve shows the benefits of scale in the production
of a particular product or component.

Typical Economies of scale can help to explain differences in cost between


application different producers.

Economies of scale are most likely to be found in industries with


large fixed costs of production such as chemicals, petroleum, steel
and automobile manufacture, etc. They are a significant barrier to
entry if fixed costs are high.

Economies of scale do not just apply to manufacturing businesses,


however. There can also be economies of advertising, promotion
and marketing.
Typical Begin by gathering the relevant data on cost per unit from your client
process (e.g. get exact capacity and cost per tonne for client in four plants).

Research your clients competitors costs through desk based or


direct research. If necessary, with project partner approval, you can
also interview competitors. For missing data, try and use your
ingenuity (e.g. by how much would your cost per unit drop if the size
of organisation doubled).

Organise your results in a table showing output and the effect of a


change in output on cost input. Use the Excel scatter function to
create your chart, and the r2 function to determine whether there is a
strong correlation.

29
Manufacturing scale curve, biscuits industry, 1997
Example
output Cost per
1,2
A 10 times increase in scale represents a
Tonne Broxburn theoretical cost improvement of 275p.
1,0 Some of this, however, would be offset by
(excl.
increased distribution and other costs.
materials, Linkoping
1993, Hatton
0,8
k/Tonne)
Durango Ashby
Gyor
0,6
Lauragais X1 Maastricht Carlisle
Dortmund
0,4
R2 = 65%
Jyvas Hyva X2
Genoa
0,2 Tyneside

0,0
1 000 10 000 100 000
Manufacturing Capacity (kTonnes, 1996, Log scale)
Source: Example

Tricks Be aware that the quality of result will depend on the number of data
and tips points used (e.g. five gives an illustrative outcome, ten to twelve
points will give more confidence).

The example above illustrates economies of scale via a decreasing


average cost curve. It is also possible to illustrate the same effect
with an increasing returns to scale diagram where the scale on the
vertical axis is inverted.

Economies of scale operate at the level of factory or plant rather than


company for manufacturing .

Be aware that there are two versions of the scale curve: one is really
about learning, the other is about scale. In the first case, the
horizontal axis should represent the cumulative number of units
produced to date and the vertical axis, the cost per unit over time.
(e.g. aeroplane manufacturing where few units are produced each
year and the cost of each unit falls as assemblers get better at it). In
the second case, the horizontal axis should represent the size of a
given process and the vertical axis the cost per unit for this process
in various plants (as above).

Manufacturing directors/managers are not often approached for


market research and are may be more willing to discuss production
units and capacity if asked the right way.

30
Executive dashboard

Description The executive dashboard is a tool designed to give a one-page


overview of the performance of a company that goes beyond simple
measures of financial performance. It provides a framework to
translate strategic objectives into measurable performance
indicators, giving the CEO/COO full and timely control over business
performance and/or business change

Typical The dashboard comprises a series of key performance indicators


application (KPIs) that look beyond financial performance alone and can address
a very wide range of issues. The most common applications are
- monitoring the performance of a business in a dynamic industry
- monitoring the progress of business process reengineering
- monitoring organisational change initiatives
Some typical example KPIs include: financial performance (turnover,
profit, working capital); employee measures (satisfaction levels,
utilisation); customer measures (churn, delivery time, satisfaction)
Most successful applications of the dashboard have supporting
exception reporting pages which identify individuals responsible for
outstanding or poor performance against targets or milestones.

Typical Dashboards are typically constructed as the final output of an earlier


study of the business fundamentals, so the first step is always to
Process review earlier work and interview team members and the client.
KPIs may be determined through a number of mechanism, including
analysis of management accounts, benchmarking, consultation with
industry experts. However, do not be surprised if a business is
seeking to build a dashboard with no clear view of the critical KPIs
(it is certainly not unknown). In this instance determination of the
critical KPIs may be long exercise including multiple client
interviews, customer interview programmes etc. Whatever, make
sure you agree the definition of each KPI and the most critical ones
which will populate the dashboard.
After the critical KPIs are determined it will be necessary to derive a
hierarchical logic tree of sub-KPIs which feed the critical measures.
It is common that the desired measures will not be (easily) available
within the business. In this instance it will be necessary to put
interim (manual) measures in place to capture the data. The
hierarchy of KPIs should stop when an individuals name can be
placed against each measure and hence be held accountable.
Finally, when constructing the dashboard panel (in HTML, Visual
Basic,Excel), always include an indication of which measures are
improving or worsening (often via traffic lights or colored arrows).

Example
output

Source: TMC proposal, May 2001

Tricks Remember: the function of the executive dashboard is to move


and tips clients from vague performance measures to sharp, quantified
performance indicators. An example might be moving from a
general awareness of the need to monitor product mix to a specific
commitment to keep to only two branded products per sales
category.
We cant measure that is not a good enough answer. There is
always a way to capture critical measures, even if the manual costs
are high.
Ask a web page designer to help with the presentation it will look
clearer than your effort. Help by keeping it simple.
If you dont have a dashboard, get out of the car.
Forecasting techniques

Description Forecasting techniques are used to project future market size and
growth from the statistical analysis of historical data.

Typical There are three main methodologies for deriving an estimate of


process market growth:
- extrapolating historical data: using time series and
statistical demand to infer trends from what has happened
in the past. This approach broadly assumes consistent
market drivers over the period in question;
- inferring from derived demand: developing a general trend
from the way demand in other related industries or
markets has changed over time; and
- compiling projective opinions: gathering multiple views
from better informed parties and constructing a best guess
estimate

The most common method for extrapolating forecasts from


historical trends is by the analysis of time series data. Time series
typically comprise four elements:
- trends: growth rates of the past market;
- cycles: long term fluctuations, usually linked to the economic
cycle;
- seasonality: consistent fluctuations throughout the year; and
- erratic or stochastic events: normally caused by events
outside an industry or markets control

Trends and cycles often require a long time to become evident and
can be masked by seasonality and erratic events. Factors can be
internal or external to a company, such as the launch of an
advertising campaign. When hard pressed for data, a good way to
forecast growth is to look to other industries or markets for
guidance:
Down-stream Up-stream Complementary Lateral
industry industry industry industry
demand supply demand demand

To forecast ... Demand for Demand for ski Demand for Demand for Mountain
steel boots car rental Bikes

Infer from ... Demand for : Supply of : Demand for : Demand for :
- automotive - winter holidays - business trips - video games
OEM
- ship building

E.g. Industries using our Industries whose Industries whose Industries which share
output output affects product / service is some characteristics
demand for our bought in conjunction with ours (customers,
products with ours etc.)

33
Asking experts for their opinion is an alternative, less formal
approach to forecasting. However, undertake this with care. Ask as
many qualified experts as possible and triangulate their views to
minimize error. Be aware that opinions can be consistently wrong if
all experts are using the same erroneous data set to base their
opinions on. Become an expert yourself by reading widely and you
will be better able to judge their views objectively.
Particularly useful for product purchases where advanced planning
Buyer is required and for new products where past data does not exist
intention Outcome valid only if the buyer has clearly formulated intentions,
surveys will carry them out and will describe them to interviewers...
Rarely used in practice (low response rate)
Frequently used
Sales force Particularly to interview competitor sales people
opinion Be aware they may try to promote a product but can be useful to
understand major changes
Very frequently used
Experts can include trade associations, independent consultants,
Expert
senior members of companies, distributors, suppliers
opinion
Care should be taken to establish the basis for their estimate -
was it based on original market research or is it a figure from
another expert?

It is not always practical to do our own research, or you may want to


independently validate expert opinions. In these situations used
published market research, and bear in mind the following:
Was it based on interviews with 1000 customers or a couple of
How was industry experts?
the market Speak to the authors(s). Do their estimates stand up?
estimated?
Frequently, lack of reconciliation is due to analysis of slightly
Reconcile
different markets, or because one person has used manufacturer
with other
selling price in one instance, retail selling price in another.
research
Check whether growth is real or nominal
Is the report thorough?
Has it been prepared by a trade body or market researchers?
Is the source
Have you had difficulties with this company's estimates before?
reliable?
Are key pieces of data excluded, e.g. not all countries covered to
the same detail?

Tricks
Forecasting periods should be kept as short as possible (no greater
and tips than 36 months) to preserve accuracy. It will, however, depend on
the product and/or sector. Established products such as sliced bread
will be easier to predict for a longer term than interactive TV, for
example.

34
Free cashflow diagram

Description The free cashflow diagram is an excellent format for displaying the
results of a cash flow analysis over time. Its strength lies in the fact
that it displays all of the key business indicators looked for by a
senior executive. These include: sources of value; fixed and
variable investment costs; break-even; net and cumulative cash
position; net present value.
Typical Free cashflow represents the net cash flow that a firm or project
application expects to generate. Unlike a cashflow statement, which attempts
to reconcile sources/uses of cash with starting/ending cash
(accounting perspective), free cash flow focuses on the key
strategic component of the generating/financing equation.
Given this, the free cashflow diagram can be used in almost all
circumstances where you need to display the commercial outcome
of any strategic business investment. It is one of the most
frequently used tools in the strategy consultants armoury.

Typical The diagram should be drawn from an earlier Excel spreadsheet


process analysis. The following steps outline the main features:
- Identify main sources of cash in and cash spend. (Be aware
that more than 5-6 sources makes the chart look cluttered and
detracts from the key messages. Consider grouping small and
non-critical sources together as other.)
- Put cash flow on the x-axis, time on the y-axis.
- Create column chart chart, showing cash above the line (use
+ve numbers) and cash costs below the line (use -ve
numbers)
- Hand draw the net cashflow and cumulative cashflow lines.
- Highlight the breakeven point and the point of maximum
exposure (highest negative cashflow).
- Name cashflow sources.
- Insert figures for net cashflow for the year and cumulative year
on year cashflow figures. This should lead to break even
analysis and an analysis of profitability.
- The key ratio for analysis is that of risk exposure - the
difference between maximum risk exposed point (worst NPV)
and best possible NPV. There is a clear link between the cash
flow diagram and the sources of value waterfall. Both show
the individual components of an overall financial flow.

Draw this picture early (in combination with your sources of value
waterfall diagram). It can form the bedrock of common sense
decisions and is a very useful communication tool with your team
and the client
35
Example 100
Base Case Cumulative
output Cash Flow cash flow
80 (m)
Corporate Actions

60 Net cash flow


Outsourcing

40 TCA

Order routing
20 OMS

ABCD
0
Ongoing costs

-20
Break-even
Fixed Investment

-40
Maximum
exposure
-60
2002 2003 2004 2005 2006
Net Cash (m) -35 -7 18 34 64
NPV (m) -35 -38 -20 8 51

Source: FSI Project, April 2001

Tricks With a little bit of tweaking you can use this format to display other
and tips time dependent factors most relevant to your client.
Try to avoid including terminal values in this presentation of cash
flows. Most business project planning anticipates pay back in the
medium term (3-4 years). In some industries terminal value can
dominate (e.g. telecom 3G licences, rail investment), in which case it
warrants a completely separate argument and representation.
Cashflow isnt everything. Consider the results of the cashflow
diagram in the light of softer issues, which may also have an impact
on the project. These could include organisation culture, recruitment
or change management.

36
Gantt chart

Description A Gannt chart is a graphical timetable of project activities and


milestones. As well as showing the planned duration of activities, it
can also be used to show responsibilities for workstreams,
interdependencies between workstreams, and critical paths.

Typical Gannt charts are used to help plan and manage projects. They
application should be used in almost any proposal to help explain how we
would carry out the engagement. They should also be updated
regularly during projects to aid project management. Whilst
Gannt charts are rarely used in final client presentations, they can
be very useful in intermediate presentations to show progress and
future plans, and to highlight project constraints.

Typical The information to be plotted on a Gannt chart should be


process obtained during the course of project planing and ongoing
management. This should include:

Project phases
Project workstreams
Activities within each workstream
Project milestones
Planned duration of activities
Effort required for each activity
Availability of resources

Gannt charts can be drawn directly in Powerpoint or developed


using a project management application such as Microsoft
Project.

Involve the project team members and the client in the


development of Gannt charts.

37
Example Project Proposal Gantt Chart
output
Pressure test vision
29 30 31 1 Project
2 3 4 5 6Proposal
7 8 9 10 11 Gantt Chart
12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Kick Start

Gather information
Develop hypothesis
Scope & workplan

Agree key drivers of client


Clients

segmentation/templates
Develop client needs
Client interviews
Form segments & CVP

Agree framework
Develop European
Market & Competitors

competitor models
Develop US competitor
models and market trends
Augment European value
propositions
UBS relative product & as is client /products
channel review
Form segments & CVP

Consolidate into strategic


client segments
Develop likely winning
Consolidation

CVP for each segment


Identify channel
implications and unserved
customers groups
Identify and scale sources
of value to UBS

Pre-wire
Meetings

Prepare board presentation

Hypothesis meeting Interim meeting Consolidation meeting Final meeting

Source:Banking project; March 2001

Tricks Use colours and dotted bars to improve clarity.


and tips Gannt charts should be living documents - project plans should
change as more information becomes available during the course of
the project.
Use real dates as column headings, rather than (say) Week 1, Week
2 etc.
Gannt charts can be very complex, particularly on large projects.
Make sure you have an up-to-date summary Gannt chart that fits on
one page so that you dont lose track of the big picture.

38
Growth share matrix

Description The growth-share matrix - developed by the Boston Consulting


Group in the 1970s - is a simple two by two, devised to map business
units or competitive position. It maps the relative positions of a
companys business units against their industrys growth rate and the
relative market share of the business unit.
Typical
application Among other things, the matrix:
- draws attention to cashflow and investment characteristics
of various types of businesses;
- encourages you to view diversified firms as a collection of
cashflows and cash requirements;
- explains why priorities for corporate resource allocation
can be different for each business.

The growth share matrix helps to determine a strategy for each


business unit to the overall benefit of the portfolio of opportunities
that a business develops.

Star
Star Question mark Question mark
High market share in high
Build market Low market shares in high growth
growth market requires plenty Hold or build
share,
Growth rate

of cash to sustain growth but market share market needs large cash input to
specialise, finance growth, but poor yields
strong market position yields
harvest, divest due to weak competitive position.
high profits
Cash cow Dog
Cash cow Hold market Harvest, Dog
High market share, low share or divest or Low market share, low growth,
growth, good cash flow can harvest specialise usually a cash trap
be used to fund developing
business
Relative market share

Typical Begin by defining your subject for analysis (market, industry,


process company) and listing the components (competitors, units, etc.).

Then, basing growth on product, market or industry size data over


three to five years, calculate the compound growth rate for each
product, market or industry. Strictly speaking, high growth
businesses are in industries growing faster than the general
economy.

Calculate the average size of product, market or industry over time


period and plot your results with growth rates against market share.
Market share is represented on a log scale, based on the largest
data point, with the largest values on the left of the chart. (The size
of the bubble should reflect the average size over the time period.)

39
The position of the vertical divide is largely a question of judgement.
However, the horizontal divide is classically placed at 10-15% and
the vertical at 1.5 or 2

Example Business Units


Product - Markets
output 25
Star D ?
F
20
E
A
15 G
Market
Growth
10 Cash Dog
(%)
Cow
B
5 C

0
10x 5x 3x 2x 1x 0.5x 0.3x 0.2x

Relative Market Share


= $30 million sales
Source: Example

Tricks
and tips Relative market share is used as a surrogate measure for economies
of scale and experience. If such economies do not exist in the
market, conclusions drawn from the growth share matrix may not
hold.

The growth share matrix a product of the 1970s. Exercise caution


when using as it may not be strictly relevant to current
circumstances. With current capital markets many firms no longer
have to rely on cash cows to finance stars.

40
Growth spread matrix

Description The growth spread matrix plots a company or divisions ability to


create value, relative to its growth. The resulting chart can be split
into four quadrants:
- destroying value and growing quickly (top left);
- destroying value and growing slowly/shrinking (bottom left);
- creating value and growing slowly/shrinking (bottom
right); and
- creating value and growing (top right)

The ideal position for a business unit, sector or companies is in the


top right corner. Companies classically tend to move around in an
anti-clockwise direction from top left to top right. A business unit
which is performing badly will have its underperforming parts cut out
or sold, leaving a healthy base which can grow and create value.

Typical A growth spread matrix is used to show the relative performance of a


application portfolio of business units or companies within a sector.
Typical Define the context for your assessment - it could be an industry,
process sector, market or company - and the sub-elements which comprise it.

Obtain the last three to five years financial results for each element.
Define the net assets of each. In the case of comparing companies
across an industry or market, you would take this information from
the balance sheet. Inside a company, the information can be derived
from the management accounts.

Calculate the growth of net assets for each element over the period
of examination.

Calculate the spread, or value generated by each element, typically


as the cashflow return on investment less the cost of capital.

Plot a bubble for each element in a matrix with growth on the vertical
and spread on the horizontal axis. The size of the bubble is
indicative of the size of the business unit.

Use annotation and shading to draw out the key conclusions


indicated by the matrix.

41
Example
Company A vs. Selected Peers
output Most Recent FYE

10%
Company C

Company B

5%
Historical Real Asset Growth

Company D

Company E
Company F
0%

Company G
Company H
-5% Company A

-10%
-10% -5% 0% 5% 10%

CFROI - CoC

= $1 Billion Inflation Adjusted Gross Assets

Source: Example

Tricks If the spread cannot be calculated easily, consider using a proxy such
and tips as economic value added. At the extreme use market capitalisation
less net assets.

42
KPC comb charts

Description The reasons that customers purchase products are central to a


companys competitive positioning.

KPC (key purchase criteria) comb charts are a way of representing


these criteria in a visually arresting manner. They allow you to:
- evaluate the comparative importance of different purchasing
criteria, and which aspects of a clients product are really
valued;
- rank your clients performance against the results of customer
research; and
- rank your client against competitors.

They are similar to Happy Line analysis that assesses how well a
company performs against the product characteristics that are really
valued by its customers.

Typical KPC comb charts form part of gap analysis and have implications for
application resource allocation. As such, they are a core part of any market
segmentation analysis exercise.

Understanding the importance of specific criteria to customers allows


a company to align its products and services more closely to those
customers and deliver greater value.
Typical The data for KPC comb analysis comes from a structured customer
process survey programme. Any interview programme is a major exercise
and should be carefully planned.

Take particular care to separate wish list needs from preferences


that apply in reality: ultimately, every consumer would like the product
to overperform, arrive immediately and be free!

The survey should be structured so to rank each criteria for each


competitor in the market.

Create an Excel table with the results and calculate an average score
for each competitor on each category.

Plot the results on a Bar + Line chart.

43
Do not forget to set the minimum and maximum for the vertical axis
to the range offered to the customers in the interview process (say,
from 1 to 10, not 0 to 10).

Apply the results with intelligence and consider accompanying the


chart with qualitative comments gathered in the interview process to
flesh out your conclusions.

Clients can take different messages from the results of this analysis.
They may wish to refocus their efforts on areas of weakness; or they
could change the messages they are taking to market so that their
stronger performance is recognized.

Example Key purchase criteria (KPC) comb, Industry X, Germany, 1999


output
10
Score 9
(1 to 10)
8

7
Criteria
6 Comp 1
Comp 2
5
Comp 3
4 Client

1
Criteria 1 Criteria 2 Criteria 3 Criteria 4 Criteria 5 Criteria 6

Key purchasing criteria


Source: Example

Tricks Customers can be segmented according to purchasing criteria. This


and tips is a useful technique used by retailers FMCG companies. FMCG
companies will develop a portfolio of products targeted at different
consumer segments (based on purchase criteria). A retailers
category will include a range of products which target all (relevant)
customers (segments) to the store.

44
Marimekko charts

Description Mekkos are one of the simplest ways of displaying data with a high
level of visual impact to develop strategic insight.

Typical Mekkos are typically used to display information about competitors


application in an industry, but can be used for a wide variety of other
applications.

They present subsets of a wider data set in a simple picture. They


can be used for almost any set of data, including:
Market/industry maps, e.g. geography and product
Cost reduction prioritisation, e.g. by process, by business group
Customer analysis, e.g. customers by company
Typical To create Mekkos, you will need to use the Magic Mekko Macro.
process
Gather your research data from appropriate sources. Divide the
data into the segments and sub-segments you wish to analyze. If
there is insufficient data for small areas, use estimates or
assumptions and document what you have done.

Create a table of the results, with one segment per column, ranked
by decreasing size. Each sub-segment of a given segment is
placed in the successive rows of the relevant column.

Copy your table into the macro tool. Format your Mekko: state the
values at the top of each bar and state the total at top right. Shade
to highlight key messages.

Note that it is possible to make a mekko without using the mekko


maker. Use the following (Agarwal) process, by developing a set of
of stacked bar charts and then stretching them in Powerpoint to the
appropriate width.

45
Example Flooring market by geography, volume (m2) of sales in 1997

output 2,297 555 373 348 211 378 240


Scandinavia
103
100%

90%

80%
Proportion of Sales Volume

70%

60%

50%

40%

30%

20%

10%

0%

France
US Germany Japan UK/

Southern

North West
Europe

Europe
Ireland
Tatami
Parquet (wood & cork)
Ceramic Volume of sales in 1997/ millions of m2
Laminate
Rubber
Linoleum
Vinyl (incl. Chlorfree)
Textile
Source: Example

Tricks In general, dont put numbers on Mekkos - they distract the reader from
and tips the impact of the image. If it is necessary to include data or
descriptions, use a separate slide.

For clarity of reading, segments of 5% or less should be grouped into


an other segment.

46
Market definition

Description A market is a place, either conceptually or physically, where a


series of different products compete against each other.
However, it is not always easy to determine which products
compete significantly enough to be considered to be within the
same market.

Markets are characterised by the sale and purchase of specific


goods or services that have a certain purpose or meet a certain
need. Because needs (and purposes) are subjective and difficult
to define, however, we have to abstract a little to arrive at a
workable test for what a market is not, rather than a neat
definition.

Typical Successful market analysis requires a robustly defined market.


application An incorrectly defined market will lead to inaccurate assessments
of market growth, competition and customers.
Typical
Begin by creating a realistic definition of the market based on your
process current knowledge.

Based on your hypothesis, define the boundaries of your market


by listing ways in which customers can be segmented; and by
ways in which it can be differentiated from contiguous markets.

Consider whether the market needs to be subdivided to account


for differences between, for example:
- Geography: the UK apple market is different to and
distinct
from the Australian market; or
- Time: the market for morning newspapers is different from
the market for evening newspapers

Identify a close product or supplier - one you think is in the market


or on the market boundary.

A strict test to define a market rigorously includes principles of


substitution. Two companies are in the same market if a change
in one companys pricing of its product leads to a significant
switch of customer to the other company. A significant switch is
one that materially impacts a companys profit margin (use expert
advice if necessary).

Repeat this process for each potential competitor until the switch
proves to be insignificant.

47
Through this, you should end up with a definition based specifically
on the key customer characteristics at play. Be aware of your
process at all times - it will explain why you have defined the market
as you did if you are questioned about it. And test your hypothesis
with team members to check its robustness.
Example
output Levels of market - Demand side

100% Example - New Covent Garden Market


Percent Total Population
UK population
Potential market - Buyers who have a potential
80 interest in flowers
Potential market
Available market - Those who have a need to buy fresh
60 flowers in bulk
Qualified available - Those who are willing and able to travel to
Available market market NCG for 5am
40
Qualified available market Served market - Those who are interested in the flowers
(target market) in stock
20 Served market
Penetrated market - The set of consumers who have
Penetrated market already bought the product
0

Tricks Be sure that the definition is relevant to the clients situation; make sure
that your definition has not been driven by data that is available.
and tips
Do not confuse markets with industries - a common mistake. Industries
are defined from the supply-side: hence, there is a single white goods
industry (built from common components in common factories), but
washing machines and dishwashers compete in different markets. Be
careful about the distinction: particularly when looking at companies
that operate in overlapping markets by selling bundled products. The
bundle provider is effectively competing against players in a series of
markets, but also attempting to create a new market for the bundle as
a whole.

48
Market entry and exit

Description The threat of entry into an industry depends on a combination of


barriers to entry and the expected incumbent reaction. The threat
of entry is reduced if there are high barriers to entry or likely
aggressive incumbent retaliation.

Exit barriers keep companies in business despite low or negative


returns. They can be economic, strategic or emotional factors
that keep companies competing in businesses even though they
may be earning low or even negative returns on investment.
Typical Understanding the size of barriers to entry and exit can help to
application estimate the likelihood of entrants to the industry/market, or of
businesses leaving the industry, thereby helping an understanding
of the industrys structure and dynamics.

Entry Barriers Exit Barriers

Identify exit barriers to understand


Identify current entry barriers
industry profitability and attractiveness
to understand industry profitability Identify exit barriers when considering
to understand how high prices
exit to allow for action to be taken to
can be set without attracting new reduce them
entrants
Develop actions to change situation
Raise entry barriers to prevent
new entrants (as an incumbent)
Lower entry barriers (as a new
entrant)

Typical Taking data from the usual research resources - client


process data/interviews, conversations with experts, analyst and brokers
reports, group analysis and supply chain analysis - try and
determine:
- the factors that make the industry accessible or
inaccessible to new entrants; and
- the factors that would restrict departure from an industry

Try and quantify each of these factors: including the resources,


relationships or scale required to successfully overcome the
barrier. Estimate both direct and residual costs associated with
leaving the industry.

Compare the levels of skills, technology, etc. against those


required to overcome the entry barriers; and any steps
incumbents may take to raise entry barriers.

Compare the cost of exit against the benefit; and any steps that
may lower exit barriers.
49
This should enable you to form and robustly defend a view of:
- the degree of industry vulnerability to new entrants;
- the sustainability of the current competitive structure;
- the drivers of current costs and margins; and
- the existing profitability structure and how it may change

Example High When both entry and


output The most attractive
exit barriers are high,
profit potential is high,
segment- few new but is usually
companies can enter accompanied by more
and poorly performing risk. Although entry is
players can exit easily deterred, unsuccessful
Entry Barriers

companies will stay


and fight
Here entry is relatively
easy and will be
attracted by upturns in
The case of low entry economic conditions or
and exit barriers is other temporary
uncommon windfalls. However
capacity will not leave
the industry when
Low conditions deteriorate

Low High
Exit Barriers
Source: Example

Tricks Barriers to entry are either structural (a result of differences in the


and tips structure between companies under consideration - incumbents and
new) or behavioral (a result of expected changes in competitive
behavior of the incumbents that run counter to the interests of the new
entrant).
Major types of barriers to ENTRY Major types of barriers to EXIT

Economies of scale Specialized assets


Product differentiation low liquidation values or high
Capital requirements transfer / conversion costs
Switching costs Fixed costs of exit
Access to distribution channels / labor agreements
property rights spare part capability
Cost disadvantages independent of Strategic interrelationships
scale, e.g. image
favorable location financial markets
proprietary technology shared facilities, etc.
access to raw materials Emotional barriers
Government policy, e.g. licensing Government / social restrictions

50
Market sizing

Description Market sizing techniques are used to understand the size of a


market an entity is operating in or is interested in entering/leaving,
once it has been accurately defined.

Typical There are three main market sizing methodologies:


process - triangulation - taking the best estimates from a range of
sources;
- top down - taking an industry whose size you know and
shaving off parts until you arrive at the required market;
and
- bottom up - building up segments to form the market you
are interested in

It is recommended that you estimate market size using two or


more of these methods at a time, typically top-down or bottom-up
supported by triangulation.

The triangulation approach involves taking the best estimate


from a range of sources providing slightly unequal estimates and
applying the five sanity checks below:
- Confidence ranging - narrowing a variety of estimates
from
different sources down to a range within which you are
fairly confident the true answer is to be found (confidence
interval);
- Feel right test - Connecting data obtained on esoteric
issues to more easily understandable dimensions and
assessing credibility of implication;
- Materiality test - Putting in perspective the differences
between the various estimates obtained typically by
expressing biggest delta as % of average value;
- Impact criticality test - Establishing whether the different
estimates obtained lead to the same outcome with regard
to the question you are really addressing; and
- Body doubling - Choosing one unique data point as the
estimate you will go with pending further information
Pool of Sanity Triangulated
estimates checks
= estimate

The top-down approach is a method that consists in shaving off


parts of something you know until you are left with the rump (e.g.
a segment size) that you were trying to estimate in the first place.

51
To construct:
- gather all the available data on the market you are trying to
estimate as well as data on broader industry sets;
- make a list of the cuts for which you have data; and
- split the starting object into a sub-set by applying the cut for
which you have the least data (e.g. split recorded music into
digital/non-digital before type).

The example below illustrates the cuts you might undertake to arrive
at one of the segments in question 3.

Estimated size of the global archive footage market 2000


Cut
$6 billion
1. The global market for visual
content is estimated to be $6bn.
$2 billion

2. The secondary visual content market accounts for approximately - $2bn.

$200 million

3. Archive footage represents approximately 10% of the secondary visual content market - $200 million.

$80 million
4. Of this archive news footage represents around 40% - $80 million.

<$8 million

5. Less than 10% of the archive footage market is believed to be digitised at present.

Source: TMC project, March 2001

The bottom up approach involves building up segments to form the


market you are interested in. For example:

Population in Group Average Amount of


Age Group Market Volume
(million persons) Low Alcohol Beer
Consumed/Annum

65+ 9,0 m X 7 liter / yr / pers =

55-64 5,6 m X 14 liter / yr / pers =

45-54 7,1 m X 20 liter / yr / pers =

35-44 7,6 m X 5 liter / yr / pers = 358m liters

25-34 9,1 m X 3 liter / yr / pers =

20-24 3,8 m X 2 liter / yr / pers =

15-19 3,5 m X 0,5 liter / yr / pers =

This approach requires detailed, disaggregated data. Take care to


obtain accurate definition of your data and avoid double counting.

52
Model front panel

Description Every financial (Excel) model should have a control panel as its first
page. This panel should display all the key variables (inputs) and all
the key results (outputs) from the model calculations.

Typical The model front panel plays a number of important functions:


application - facilitates identification of key parameters and their influence on
the critical outputs
- allows you to ask what if questions when the model is pressure
tested by your manager/partner or client
- allows live sensitivity analysis and interaction
- acts as a communication tool
- facilitates buy-in from the client and other audiences when
presenting a model

Typical Typically, two types components constitute a model front panel. They
process are as follows:
- controls: features such as scroll bars, check boxes and option
buttons in Excel. These are created by using the "Forms" toolbar.
Hover the mouse pointer over the buttons contained on the
Forms toolbar in order to determine the control that each one
defines.
- gauges: Excel charts or simple tables
A third element that is sometimes introduced into a front panel is
model scenarios, where lower, base and upper-case parameters and
their impacts are displayed.
The process for constructing a front panel is more common sense
than technique. However, a few pointers may be useful:
- understand business need for model how and by whom the model
is going to be used.
- before going anywhere near a computer, structure the model and
panel on paper.
- work out the answer on the back of an envelope. This is critical,
both as a common sense check and as a very powerful
demonstration to the client that you understand the key drivers
- poll client and/or manager/partner to identify likely key controls
and gauges and scenarios that should be modeled.
- develop heart of model, and front panel prototype. Play with the
model get the feel of it.
- revisit each of the stakeholders, demonstrating prototype front
end and explain intended functions.
- refine - then refine again throughout the project .

53
Example
output

Source: FSI pricing project, Feb 2001

Tricks If you cant build a simple front panel you have not got to the heart of
and tips the problem. Ask yourself what is really critical to the strategic
outcome of the situation I am modelling?
In most cases, an informal process is sufficient, but for large-scale
models, building this methodology into the JAL and milestones.
The best way of learning how to use Excel controls is to design some
yourself using a new workbook. Learn how to use scrolls bars,
spinners, option buttons and group boxes, drop down boxes and
check boxes.
When you have discovered a new (for you) trick to simplifying your
front panel, pick up the phone there and then and tell a colleague.

54
Parfait charts

Description A Parfait chart is a simple way of displaying the absolute size of


market segments and their relative growth over a given time
period.

Typical A Parfait chart is used when analyzing an industry or market to


application help understand historical growth and its drivers. It is also used to
locate your clients performance in relation to market growth, to
understand its current position and future direction.

Typical Plotting a Parfait chart requires an Excel table and the Area function
process in the Chart menu.

Begin by defining the market you are assessing and obtain figures,
typically of sales, for each competitor.

Gather your data from analyst, company or brokers reports. Take


care to account for the reliability of the information - examine how the
market was estimated, how it compares to other estimates, and so
on. If no data is available you may need to infer from contiguous
industries (suppliers or buyers).

Plot the chart with time on the horizontal axis and sales on the
vertical. Reorder your chart to put the largest data group at the
bottom and changes that only occur later in the period at the top.

In addition, calculate CAGRs for the period of examination.

Once you have completed the construction of a chart, take time to


look and think about its meaning. You should be able to begin to
make general assertions about the drivers of change - increasing
revenues may be derived from growing volumes or rising prices, for
example.

55
Example
output Industry X sales, 1992-1996 CAGR (%)
(1992-96)

18
m 16
14
A 213%
12
6.1%
10 B -9.8%
C
8 7.4%
D
6
4 E -0.8%
2
0
1992 1993 1994 1995 1996
Source: Example

Tricks Ensure you are assessing the market in real terms (meaning that you
are compensating for inflation). To do this, obtain indexed inflation
and tips
rates (usually available from government resources), and divide your
figures by the indexed inflation rate - you may need to rebase your
figures if the index year is not the year in which your statistics begin.

Once a market estimate has been published by a reputable source, it


is often drawn on widely. Always check the source of your data to see
how carefully the researcher has assessed the marketplace and
whether multiple sources of data have been employed. Take care to
trace sources and evaluate their reliability. If you are uncertain about
the reliability of a source, trace the analyst and ask them how the
estimate was made.

When inferring market growth from contiguous industries, try and


make reasonable inferences based on shared characteristics. For
example, demand for car rental might be inferred from demand for
business trips. However, always take care to specifically state your
inferences and the limitations they may have (see forecasting
techniques tools).

Use annotation and/or commentary to bring out the key messages of a


particular chart in advance of discussion or presentation to the client.
This will allow you to clarify your view on the behavior of the market.
Use shading to pull out key messages you wish to present to your
client.

56
Partnering maps

Description Producing a partnering map is a way of simultaneously mapping out


all the activities a particular company performs, and attaching a
relative importance to each of those categories. By ranking each
activity on two scales, a client can quickly see where the company
falls short and how easy or difficult it would prove to rectify this.

Typical Partnering maps are a very quick tool for business planning,
application negotiations or business restructuring exercises, that allows you to
focus on which elements of a particular business are crucial to the
company, and which are less important or damaging to overall
performance.

Partnering maps can be used for:


- planning for strategic acquisitions or divestments;
- preparing for negotiations over mergers, alliances,
partnerships or outsourcing agreements;
- realigning corporate structure;
- planning future strategic direction; and
- build vs. buy decisions

As an exercise, it is most effective if it takes place in discussion with


a group of representatives, where the Andersen personnel facilitate a
discussion of relative performance. This way, the exercise reinforces
the critical elements of a discussion that would have to take place
anyway.
Typical Well in advance, decide as a team what the critical value driver is.
process Typically, this might be potential to generate customer intimacy; an
alternative axis may be relative capacity to differentiate, or
something quantitative such as NPV.

Ensure you have a complete list of relevant activites.

Try to have a dry-run of the exercise with the project team at least
once before the actual client meeting. List all the key challenges that
are likely to arrive when the exercise is repeated with the client.

In discussion with the client, place each activity on the map - with
relative capability on the horizontal axis, and the key criteria on the
vertical.

Remember, this is a rough and ready exercise, designed to separate


activities into three broad categories. The exact position isnt crucial.
Challenge the client vigorously, but not dogmatically.

57
Analyze the results and draw conclusions.

Draw out the implications of the completed activity map: you should
be able to isolate which activities are walk-aways, which are points
of true negotiation, and which are hostages to fortune.
Example
output
Must have Nice to have

High
Customer Content
Application problem Packager
integrator/ developer solver
Customer
Highly innovative

Nice to have
Brand adviser
manager Other application
product/ service developer
ISP Data provider
Billing mining
ePurchasing Sales
/payment
provider Customer data
manager
Potential for Channel Marketing
license (context
building owner building)
customer
Banking
intimacy product
Standards
influencer Community PDA
provider
builder provider

Credit
Risk
assessor

Market
analysis Handset
Underwriter

Dont want
manufacturer
Certifying
Binary authority
transaction
processor Channel
provider
Financial Bad debt
controller manager
Low

High Current capability Low


Source: Vince Colvin

Tricks
The biggest problem with this exercise is failure to articulate the
and tips elements which feed into the value and capability adequately. Make
sure the client is total clear what you are referring to and is on
board. (You may wish to pre-wire the meeting with a friendly, junior
member of the client team who is already on side for the project.)

Challenge your client hard, but dont be too inflexible. Make sure you
capture all the elements that are contentious so you can take them
and do further analysis.

Do not always believe that capabilities can easily be altered, if the


client confidently asserts they can.

58
PEST analysis

Description PEST is an acronym for Political, Economic, Sociocultural and


Technological. The tool is an aide memoir to ensure you cover all the
external forces/risks that may have an impact on the company, market
or industry under consideration. PEST analysis should be performed
early on in an project as it helps identify and priorities research efforts.

Typical PEST analysis is a simple framework to structure an informal analysis


application of the EXTERNAL forces acting on a market. It is universally applicable
and simple and can provide insight early on in a project

Typical PEST is essentially a framework to assist thinking and as such there is


process no process to work through. Below is a categorised list of the issues,
that may be relevant to each case.
From the long list of issues prioritise the most important by size of
impact on the client and probability of occurrence. (Consider both
current and emerging issues). Assessing the size of the impact and
probability of occurrence will relate to the type of risk identified.
Political Factors
The political arena has a huge influence upon the regulation of
businesses, and the spending power of consumers and other
businesses. You must consider issues such as:
- the stability of the political environment
- will government policy influence laws that regulate or tax your
business (Employment/Health & Safety/Environmental/Industry
specific legislation)?
- potential changes in Government/Government policy
Economic Factors
You will need to consider the state of a trading economy in the short
and long-terms. This is especially true when performing analysis for
clients with an international focus. You need to look at:
Interest rates
- the level of inflation
- employment/income/asset holding level per capita
- long-term prospects for the economy: GDP per capita etc.
Sociocultural Factors
The social and cultural influences on business vary by geography and
must be accounted for. Factors include:
- attitudes to foreign products and services
- changing consumer tastes/preferences/fashions
- how much time consumers have for leisure?
- socio-demographic profile of the customer base and its dynamics

59
Technological Factors
Technology is vital for competitive advantage, and is a major driver
of globalization. Consider the following points:
- does technology allow for products and services to be made
more cheaply and to a better standard of quality?
- do the technologies offer consumers and businesses more
innovative products and services such as Internet banking, new
generation mobile telephones, etc?
- how is distribution changed by new technologies, e.g. books via
the Internet, flight tickets, auctions, etc?
- does technology offer companies a new way to communicate
with consumers, e.g. banners, Customer Relationship
Management (CRM), etc?

Example PEST assessment


output
Watching brief should be
High
developed and Key issues, the
implications considered. implications of which
Not immediately should be included in
necessary to formally strategic planning
Scale of impact

included in strategic process


planning process

Tactically adjust strategic


Low priority, no action
planning process if
required
required
Low

Low High
Probability

Tricks Brainstorm all possible risk factors before analysing each in more
and tips detail. PEST analysis can never be complete, apply the 80:20
rule in deciding where to stop.
Do not spend too much time in the lower left quadrant.

60
Porters five forces

Description Porters Five Forces model is probably the most famous and widely
used strategic tool. It is a useful check list of issues that needs to be
considered when analyzing and assessing a companys competitive
positioning. The five forces are: rivalry amongst competitors; threat of
new entrants; power of suppliers; power of customers; and the threat
of substitution
The underlying principal is the weaker the competitive forces, the
greater an industrys profitability. By implication, a company whose
strategy and market position provides a good defense against the five
forces can earn above-average profits.
At root, it is a great checklist for describing an industry. It helps you
organise your research and provides a good framework in which to
present your findings

Typical Porters Five Forces is most useful:


application - when you are trying to understand a new industry or market
- before building a hypothesis at the beginning of an assignment
- structuring and communicating your existing industry knowledge
- defining the boundaries of an industry and you clients role within
it

Typical Begin by reading widely (broad and shallow to begin), with the
Process framework always in mind. Use analyst reports, annual reports;
existing analysis and internal experts.
Carefully define your industry. Using this definition rigorously, list the
main players in each of the five categories: competitors, suppliers,
customers/ buyers, new entrants, and substitutes.
Continue by carrying out a search on the names you have compiled,
and gather company and brokers reports. Pull the relevant articles
together and get reading!
When you are reading the material, think about the themes listed
below. Lift the most common comments into a structured Word
document.
Organize your results into five boxes, summarize and conclude in the
light of the purpose of the research as given to you by the client.
You should now have a much clearer picture of the market.
Where does the work you are doing fit into the picture of the industry
you have developed through the model?

61
Example Porters Five Forces Map
output
Threat of new entrants
The behavior and market
The potential for new
strategies of competitors.
entrants and the likely
Factors include industry
level of disruption
growth, product and brand
caused by their arrival
distinctiveness, and
barriers to exit

Bargaining power of Bargaining power of


suppliers Rivalry among customers
competitors

Threat of substitution
The bargaining power and The changing
pressures on suppliers - preferences and
this category also includes bargaining power of
questions over the ease of customers or buyers: the
changing suppliers, the impact of volume,
availability of substitute How products and choice, information
products and any technologies may replace availability on behavior
economies of scale current ones and the
impact of this - how easy
this will be, including the
cost of changing product
or technology

Source: Example

Tricks Two limitations to Porters model are often encountered:


and tips - regulation can be a very real sixth force not explicitly addressed
- the model is static and takes little account of the changes
occurring in a industry
Bear in mind that the model is extremely widely known, and will not
impress a client by itself. This is just a starting point to strategic
thinking.
Keep a good balance between words and data, but try to provide
numerical indicators where possible (e.g. cagr =14% is far more
informative than growth is strong)

62
Portfolio matrix

Description Helping clients prioritise strategic options in an environment of


scarce resources is a key element of our work. The portfolio
matrix - a simple bubble chart that plots the value of options
against the ease with which they can be implemented - is
designed to assist in this process.

Typically based on NPV and a pre-agreed set of prioritisation


criteria, it allows the quick evaluation of which options are the
most difficult to put in place and their potential value.
Typical
Portfolio matrices enable businesses to underpin their choices
application with a clear, data-based framework. Businesses can choose
which projects to undertake now, which projects to undertake in
the medium term and which projects to put on hold because of
insurmountable barriers. They also help businesses quantify the
expected benefits from the projects they plan to undertake.

Typical Explicitly define each opportunity. Then identify criteria which


process provide insight into the ease of implementation of each, based on
the business context. Standard criteria might include project scale,
systems requirements, skills availability and structural obstacles.

Review each of the options either through detailed market research


or through brainstorming sessions, and score them against pre-
agreed criteria.

Meanwhile, isolate the NPV impact of each option. If it is not


possible to use NPV for this, you can use cash flow or profit, but
accounting techniques and lack of market risk premium mean that
these measures will not be as reliable.

Remember to use a standard NPV format, for example a five year


timescale with nil terminal value.

Create the chart and annotate it with key assumptions and a scale
bubble; and let the area of each bubble reflect the size of the NPV.

Research and brainstorm any softer issues that the options may
present (such as the impact on employees morale of working away
from home).

Document the major impacts and present these near the chart.

63
Example
Attractiveness vs. ease of implementation
output 56 million

Overall
proposition

20
Inherently attractive Basic
proposition
20m

NPV
15 2002-2006

Financial
attractiveness Back-office outsourcing
NPV 2002-2006
(m)
10

Corporate actions

Light blue shading


indicates key
elements of core
5 Smart order routing proposition

Trade cost analytics

OMS Inherently unattractive


0

High Low
Ease of implementation

Source: FSI project, May 2001

Tricks It is possible to segment the chart in many ways (e.g. quarters, waves,
and tips grouping or slices) depending on results and the key message. The
most common way is in quarters, as shown above.

64
RACI analysis

Description RACI stands for Responsible-Accountable-Consulted-Informed.


RACI analysis is a clear and simple way of mapping and assigning
functions between departments or individuals to ensure all activities
are managed optimally.
The four distinct roles are constructed on a grid allowing you to
determine exactly who should be influencing and taking
responsibility for each key step in a process with no conflicting or
unaccounted activities

Typical RACI analysis often forms part of business process reengineering


application (BPR) or organisational change engagements. However, it can be
used very effectively within capability gap assessment exercises,
process mapping etc. (or even in constructing assignment roles).

Typical The starting point for this analysis is typically a clearly defined set
process of processes for the business.
Form a value chain or process map. In discussion with the client,
ensure your value chain is MECE and at a sufficient level to
determine activities that may be separable in terms of people
skills, technology, physical outputs etc.
List each activity along one axis (either vertical or horizontal)
Against the other axis list the personnel (or department) who are
may be directly related to the process. You should consider
existing staff, potentially new staff, and/or outsource agencies. It
is also important at this stage to be aware of other processes that
may share skills so dont look at each process in isolation.
It is helpful to place the most senior people on the left,
proceeding to the most junior on the right. This will facilitate
grouping of activities in the next step.
Taking each activity in turn, determine in discussion with your
client which individual (only one) should take responsibility for
each activity, which individuals are accountable for the
deliverables, which should be consulted and which need to be
informed. Place the relevant letter in the relevant box.
Use the resulting grid to identify clusters of activities, duplication
of roles, lack of roles etc. In particular you should be looking for:
simple demarcation; one person accountable for an activity;
limited consulting; limited informing
Derive recommendations for your client.

65
Example Outsource provider interview process
output
AB PR SS TJ AD DC SD NN PW HC DC ED LY MC Dept RD PdV GR OS PF JH Dir. PY
Specify Resources A R C C R C C I I

Build Acceptance A I R C C C C C C C C C C I I C I I
Criteria

Identify Providers A I R C R I I

Develop Provider A R C C C C C C I I I I I I C C C I
Review Processes

Interview providers A R I I I I I I I I I I I I R I R

Document A R I I I I I I
Interviews

Cultivation A R I I I I I C C I
relationship

Integrate A R R R I

Source: Example

Tricks This analysis does not take the place of process design, but builds
and tips upon it. However, you should always look to simplify the process
and the number of people involved.
This step is often highly contentious. Ensure that you have
rigorously tested your ideas internally before taking them to the
client. It is always better to co-develop a RACI chart with proactive
client team members first.
RACI charts are often called RAID charts (Responsible
Accountable - Informed - Discuss)

66
Reverse costing

Description Reverse costing compares a business cost position relative to key


competitors, activity by activity, by inferring cost structures and their
drivers. It involves estimating a competitors cost structure and
comparing it to the clients to understand areas of relative strength
and weakness.
Typical By comparing a clients cost to its competitors, insights can be found
application regarding the key drivers of competitiveness.

Typical Reverse costing involves taking what you know about a clients
process business and comparing to a competitors business to identify where
competitive disparities lie.

Start by taking the client company cost structure (based on activities)


and begin to model differences in a competitors cost structure by
taking into account known or estimated differences such as:
- Number of people / shifts;
- Specific equipment used;
- Plant output volumes;
- Product specifications;
- Scrap / by-product volumes produced;
- Plant size / layout; and
- Distribution system

Where hard data is unavailable, estimate the effect on the competitor


of, for example, scale factors, and by asking client company experts.

67
Example
output
20
Labour
Activity 3
Materials
15

Labour
Cost
Per 10
Unit Activity 2
() Materials

Labour
Activity 1
Materials
0
Client Costs Competitor Product Design Competitor Product Competitor Product Competitor Product
Our Technology Competitor Technology Competitor Technology Competitor Technology
Our Factor Costs Our Factor Costs Competitor Factor Costs Competitor Factor Costs
Our Scale Our Scale Our Scale Competitor Scale
Source: Example

Tricks If the product is simple, with relatively few inputs, then reverse
and tips costing may work (e.g. cardboard boxes), if the process is complex
(e.g. car) then think about trying another tool.

Reverse costing relies to some extent on guesswork. Make sure you


document how you arrive at the final figures and what assumptions
you make. Industry experts will have insights into cost structure,
activity chains and cost allocation guidelines. In addition, carry out
sensitivity analysis on your data so that you know the range of likely
competitor costs.

68
Risk matrix

Description The risk matrix is a simple structure for identifying the key risks
associated with an opportunity, and prioritising the actions necessary
to mitigate those risks. There are many possible structures that could
be used to achieve this end, however all share the common property
of defining both scale and controllability of each risk.

Typical The risk matrix is useful for clarifying decisions around complex, non-
application independent risks which arise from almost every business decision.
Typically, any individual investment project or portfolio decision would
benefit from such an analysis.
A very common situation in which this tool is used is when deciding
whether to take part in an alliance venture. In this instance it helps
answer the questions like:
- what is my greatest risk?
- how costly will it be if I cannot mitigate it?
- what shape of alliance would minimise my risk exposure.
- for those risks outside my control (e.g. market risk), what is the
potential downside? etc.

Typical Throughout any financial modeling exercise, identify those variables


process which most heavily effect the desired outcome (e.g. which elements
have most influence on NPV). Determine the monetary value of the
loss if the key variables change by (say) 5%. This is a hard measure
of risk.
Additionally, identify non-financial risks, typically in the following
classes: operational risk; brand risk; human capital risk; technology
risk; and timing risk. Attempt to scale these risks comparatively. Many
of these can only be scaled in discussion with your colleagues and the
client. These are soft risks, but are equally real.
Use a two-by-two to plot all the risks by Significance (high, medium,
low) and degree of controllability (manageable, mitigatable, non-
controllable)
Use bubble size to accentuate the scale of risk (making area
proportional to monetary impact). Additionally, shade bubbles where it
adds clarity.
This exercise is best performed 2/3 of the way through a modelling
exercise.
Test your findings with your team and share it with the client
ensuring consistency of logic (especially for soft risks).

69
Example
output HIGH
A. Level of inbound order flows from
C A
partners
High C. Exchange rate changes
D. Tie in of OMFS affiliate companies to EA
F
D E. Trading role (Sell order-flow or agency)
E F. Handling of corporate actions
K. Partner competence and fit
Significance of risk

P. DVP and intra-day cash exposure


P K
G B
M MEDIUM
L H B. Single currency cost transparency
Medium I G. Merrill Lynch competitive product
N J H. Jiway competitive product
O
I. E-Cortal competitive product
J. Market consolidation
L. Lack of clearly defined exit scenarios
Q
M. Quality of research delivered
R N. Technology competence
O. Custody systems
Q. Need to route all overseas business
Low W R. Potential failure of EA network
T
U S LOW
X V S. Quality of research received
T. Free riding on partner research and
orders
Mitigation / U. Ability of EA to change fee
Manageable risk Outside OMFS control
Negotiation V. Additional finance
W. CLSA directors power
X. Marketing of EA

Key
Risks falling Note: The bubble size
under the Internal risks represents the potential
following Project risks financial impact
categories: Market risks

Source: FSI Project, April 2001

Tricks Use common sense when identifying risks, consider only those with a
and tips realistic possibility of occurring or having impact. List only the issues
that are at the root cause of the risk, rather than a number of knock-
on effects entirely dependent upon it.
Do not be precious about the absolute location of the bubbles. The
critical factor is whether the key risks (top right hand side on the
above chart) can be borne by your client.
Do not stop when you have finished your risk chart. You must drive
on to determine what actions must be taken to guarantee minimum
risk and to determine the benefits case in this instance.

70
RONA chart

Description In exploring a companys strategies, it is important to see how they


used their asset base in making profits.

The RONA chart expands basic profitability/opportunity cost analysis


and shows the various business models adopted by different
companies in a segment. Some opt for high return on sales, typically
on low relative sales volumes, whilst others concentrate on high
volumes and a relatively low return on sales. This does, however,
vary by industry and market.

The RONA charts two axes show the constituent parts of the return
on net assets equation shown below: return on sales (how profitable
a business is) multiplied by sales/asset turnover (how efficiently a
business uses its assets).

Return on sales Asset turnover = Return on net assets


(Profit/Sales) (Sales/net assets) (Profit/net assets)

Typical Return on net assets (RONA) is a technique to explore how


application businesses make money from their asset base. Particularly if they
are used in conjunction with sector charts, they can be used to
assess the apparent strategies of competitors.

Typical Begin with the usual data gathering process. Identify your market or
process industry, list the companies or business within this, and obtain
company annual reports and any other relevant data over a minimum
three year period.

Check the definition of net assets, profits and sales to be used. If in


doubt, get expert advice.

For profits and sales, check for unusual or non-recurring items like
disposal of investments or write downs. For net assets, check for
unusual or non-recurring items such as acquisitions or treatment of
goodwill.

Create a spreadsheet table with sales, profits and net assets over the
selected timescale.

71
Root cause analysis

Description When trying to understand why a business phenomenon occurs, it is


not enough just to ask a few well chosen questions. Root Cause
Analysis is a structured, logic-tree approach to asking the question
why? It enables you to get to the heart of an issue, with a high
degree of confidence that you have been MECE, and that your
conclusions can be numerically supported.

Typical Root Cause Analysis is most commonly used for structuring interview
programmes to unearth the reason(s) why individuals display certain
application
behaviors. For example: Why is our customer churn rate almost
twice the industry average?; Why do my staff in Sidney lose fewer
working days than those in Munich?
The utility of this technique is only realized when you reach a
question that is actionable and you have asked a large enough
population to get a measure of the scale/importance of the issue.
Clearly there are other more detailed and statistically more rigorous
methods for unearthing behavioral logic, but as a rapid tool for
getting to the heart of an issue, Root Cause Analysis is hard to beat.

Typical As ever, the first step is to contact colleagues to see what similar
process exercises have been done in the past, and to draw on expert
opinion as to the cause of the issue at hand. Industry expertise
is invaluable here.
Next, draw your own hypothesis (with numerical weightings) to
help guide your questionnaire. Draft a questionnaire and try it
on team members and manager/partner. Then test it with the
client.
If you spend the time to make the questionnaire simple and
clearly worded it may be possible to outsource the execution to a
third party agency. However, always sit on the shoulder of a
third-party agent for the first set of interviews. This is essential,
as: you are closer to the issue; you can see which questions
work better than others; you will be far more tenacious in getting
a result. Then improve the questionnaire.
Typically, aim for logic to go 4-6 levels deep, and keep it simple.
Use a grading scale of 1-5 for each question where applicable
(or yes/no if necessary). Be sure to ask some open questions,
as this captures responses you may not have anticipated and
(nearly always) provides powerful quotes.
Preferably, use Microsoft Access to analyze the results, but use
a hard copy questionnaire whilst interviewing
Finally, populate the tree and derive implications for your client.
72
Example Insurance product provider root cause analysis
output
Why didnt you purchase
Normalized to
further products from us?
100 customers
20% 80%

I considered you I didnt consider you

50% 50%
I was aware of your I wasnt aware of
products your products 40

60% 25% 15% 50% 30% 17% 3%

Poor Weak
Not top Recomme Not top Conven
product relation- Reputation
of mind ndation of mind - ience
features ship
12 5 3 12 6 2

52% 29% 11% 8%

Too
Poor quality infrequent Poor contact Not
staff contact processes proactive

10 6 2 2

Source: Example

Tricks Dont let your conclusion be overly colored by one or two


and tips impressive/influential interviewees. Remain objective.
There is always someone who will say Im not sure this is
statistically significant. Two comments:-
- this may be true if you have a small population of interviewees.
But you will be surprised at how rapidly significance is
reached for binomial processes (see any good statistics book)
- statistical significance is not always necessary, especially if
your work forms the early part of a strategic direction setting
exercise. Later, it may be desirable to combine this with
related technical analyses such as multivariate regression,
factor analysis, cluster analysis etc. Be aware of the use and
limitation of your analysis.

73
ROS/RMS analysis

Description ROS/RMS analysis demonstrates the strength of relationship


between relative size of companies in an industry and their
profitability. It is a quick and visually clear way of demonstrating the
significance or otherwise of scale economies.

The ROS/RMS chart itself plots average return on sales against


relative market share for each competitor in the industry. The result
shows whether there is any competitive advantage to be gained from
economies of scale, and - more importantly - how significant those
economies of scale are.

Typical ROS/RMS charts are a useful tool to employ in any market analysis
application exercise, and relatively easy to create.

Begin by defining the industry you are examining and listing all the
players. Check the definition of profits and sales you will be using for
consistency.

Obtain annual reports for the last three to five years for each of the
competitors you have identified. Strip down competitor sales to the
relevant segments and estimate comparative profitability.
Typical
process Make sure you are comparing like with like: watch out for profits on
sale of investments, extraordinary write-offs or other unusual items.

Create a spreadsheet in Excel with sales and profits over time for
each competitor.

Plot the table as a bubble chart with the relative market share (at the
end of the period of analysis, relative to the largest player) on the
horizontal axis and the return on sales on the vertical.

Use a log scale for the relative market share (small market shares
should be towards the left.

You can use the bubbles to represent the size of company.

74
Add trend lines to draw out the general economy of scale tendency in
the industry. The angle (steepness) of the trend lines indicates the
relative economies of scale at work in the industry.

Identify any competitors that are significantly different and check your
data. If you are confident you are comparing like with like,
investigate what the competitor does differently.

Example ROS - RMS ROS - RMS


output Industry A Industry B
25% 25%
ROS 20 ROS 20
(last 3 (last 3
years, 15 years, 15
%) %)
10 10
5 5
0 0
1.00 1.00
-5 -5
-10 -10
-15 -15
-20 -20
-25 RMS (log) -25 RMS (log)

Source: Example

Tricks Do not forget to use at least a three year average for return on sales.
and tips
Plot the data you have even if it is not complete: partial data is better
than nothing.

Consider calling the competitor if no information is available (after


discussion with the projects manager) - to gain an idea of segment
profitability (i.e. higher or lower than others).

The tool is best used comparatively - see diagram above.

75
Scenario development

Description Scenario development is a methodology to help manage the


future. Where traditional analysis predicts the near future in terms
of historic and current trends scenario planning considers large-
scale forces that will push the future in different directions. The
process is as much a part of the benefit as the outcome, allowing
managers to generate and share ideas in a positive environment,
leaving a company better placed to react to changing future events.
Scenario development suggests a number of distinctively different
alternative futures, each of which are possible. These scenarios of
the future focus less on predicting outcomes and more on
understanding the forces that would eventually compel an outcome;
less on figures and more on insight. They are more concerned with
understanding the discontinuities in creating alternative futures by
recognising that the structure of the environment may change.

Typical Scenario planning can be applied to any changing environment, but


application is generally most successful in industries which face major change
to underlying fundamentals of environment and competition. Most
famously it has been adopted by Shell (oil), the NHS (health
service), and ICL (telco supply).

Typical There are many variants on how to run a full scenario planning
process engagement, but all begin with gaining an understanding of the
industry via client interviews, industry experts, and micro and
macro environment analysis
A decision focused scenario process will take the following form:
- clarify strategic decisions the scenarios seek to address (ie.
what would you like to know about the future to improve your
decisions?)
- agree key decision factors
- determine environmental forces at two levels :market/industry
level (micro) and an economic/political/technical level (macro)
- develop 3-6 scenarios - often called logics. (e.g. global giants
will dominate, industry will fragment, boundaries will blur, etc.)
- describe the scenarios in enough detail to identify implications
on the strategic decisions
- Identify strategic implications
- feed back into the original strategic decisions
This process is done in teams and workshops with the client.

76
Example
output High Global media
technology Non-individual focus giants
state control Control of all
Power becomes
Universal content/ formats
more centralised
surveillance Increasingly
Police politically and
states/blocks economically
guided
Tomorrow
Big brother
never dies

Technology
becomes less Technology
Today becomes more
popular
popular
Technology Technology
push pull
Virtual
Technophobia
communities
Technological Geographical
rejection boundaries
through become less
possible Power becomes relevant
technology less centralised Change from
failure haves/ have
Individual focus
Spiritual nots to wants/
Renaissance dont want

Source: Halo Group

Tricks This is a very interactive process but every client interaction should
and tips be well prepared. Typically this means approaching each interaction
with an overtly open mind, but a straw-man in your back pocket.

Remember, this is not about predicting the future, its about being
better prepared than anyone else to anticipate and react to change.

Help stretch your thinking further by applying parallel tools e.g:


bridgehead mapping, ecosystem mapping, value migration, asset
extension modeling, BCG growth-share matrix etc.

77
Sector charts

Description The sector chart is a fairly simple, visually arresting demonstration


of relative positions of competitors in a sector or industry.

The sector chart tool is similar to a BCG matrix, however the BCG
matrix is from the point of view of a particular company rather
than the market as a whole. By contrast, sector charts are
calculated in reference to the largest market player at the end of a
particular period.

Typical This tool should be used to uncover the competitive dynamics


application with a market or industry. By understanding the relative
performance of players by changing market share we can
construct a number of strategic implications for the client.

(See also: Share Gain Line tool.)


Typical
As usual, begin by carefully defining the market you are looking
process at. Identify the main players in the market and, through the usual
research methods, calculate their size in relation to the market.

Now calculate the growth rates for each player. Typically, the
values for growth are calculated over a period of three to five
years. Simply calculate the size at period start and end, and
divide by the number of years.

Plot the different companies as bubbles on the graph with the


relative market share at the end of the period as the horizontal
axis and growth on the vertical.

The area (note: not the radius) of the bubbles can be used to
represent the absolute size of each of the companies at the end
of the period of examination. Always make sure to add a key
which shows the scale for the bubbles.

Looking at the resulting values can tell you a great deal about the
changing face of a particular market. For example, if the smaller
players are grouped high up the chart, this suggests a process of
market fragmentation is taking place, and by contrast if the growth
is focused on the large players, the market is consolidating.

If you wish to use an others category for a fragmented market,


separate the bubble - it is not a large market player.

78
Copy and paste chart into Powerpoint, then ungroup the chart,
deleting all but the stacked column.

Group the column, rotate (using flip function) so that largest segment
lies on left hand side and adjust re-size to fit in area, ensuring that
you have locked the aspect ratio.

For each segment follow the previous steps, but instead of flipping, fit
the columns to the segment size.

Example ABC Sector, 1996 - 2000


output Company E
40%

Company C
Company I
30%

Company D
20%
Real Company B
Annual Company J
Growth 10%
(%) Company K

Sector
0% Company A Company H CAGR = 8.6%

Company F
-10% Company G

-20%
2X 1.5X 1X 0.5X 0.3X 0.2X 0.1X 0.05X 0.03X 0.02X 0.01X

Relative Market Share


= $1 billion revenue, 2000
Source: Example
Tricks For purposes of clarity when presenting the information, it is wise to
and tips calculate the relative market share on a logarithmic scale.

If comparing a number of charts, make sure you retain a consistent


scale on both axes.

Adding a sector average growth line to the chart can be useful.

79
Sensitivity charts

Description Commercial models used to guide strategic decisions nearly always


depend upon assumption - about the market, our clients ability to
capture share, the ability to implement etc. A sensitivity chart is a
clear mechanism for displaying the impact of assumptions in your
model. It achieves this through varying the most critical assumptions
and then recording the change to the key outputs.

Typical Sensitivity analysis is a fundamental part of the construction of any


application business model. It allows you to determine and communicate the
key assumptions in your model in terms of the impact they have on
the bottom line of the business.
Sensitivity analysis can also indicate any flaws in the functioning of
the model - keep your eye out when conducting sensitivity analysis
for erratic or unusual changes due to minor alterations in inputs.

Typical Based upon your growing understanding of the issue, build an Excel
process model. As the model develops be aware of which factors are having
most impact on your critical outputs, and question heavily the nature
and scale of the assumptions you are making about these factors.
Ensure all key assumptions are isolated (typically 5-15), and ensure
the model updates assumptions in real time.
Taking each key assumption in turn alter the value by +/- five percent.
(For example, an assumption of 50% cagr would become 52.5%
cagr NOT 55.0%). The sign of the alteration should be chosen to
give a positive change in the observed output.
Note the new values and calculate the percentage change in the
observed output. Reset the assumption then repeat the process.
Continue until you have tested all key assumptions.
Rank assumptions in terms of significance to the observed output
and plot. It is advisable to place the most sensitive assumptions in
the control panel on the front page of your model, so the client can
change the values during interactive sessions.
Look carefully at the most sensitive values and make sure you are
particularly confident of them in advance of presenting the model
Significant time should be spent on this activity..
This will allow you to focus your time on those issues which are most
pertinent (and potentially most contentious) for the client.

80
Example Sensitivity for Global Equity trader
output
% change in 5 year NPV upon +/-5% in variable
0% 2% 4% 6% 8% 10% 12% 14% 16%

Flat $5 fee from option 15.2%

Inbound volume 13.3%

Exchange rate $/ 7.2%


Inbound growth rate 7.1%
US % of total inbound 6.0%

Pre tax cost of capital 5.5%


HR overhead load factor 5.0%

Investment cost of $9m 3.9%

Market making 3.9%

Exchange rate /euro 2.4%

Set fee 2.3%


Dividend distribution 2.2%

Outbound volume factor 2.0%

US settlement fee 1.0% Source: FSI project, April 2001

Tricks Do not confuse the 5% changes you are making to assumptions with
and tips real-world events. This is simply a constant figure to demonstrate
the impact (linear or non-linear) to selected outputs. The anticipated
range of your assumptions should be reflected in a parallel
upper/lower bound analysis.
5% is not cast in stone. Use a more appropriate (but constant)
figure where applicable to your industry (e.g 50 basis points may be
more appropriate if your model concerns insurance product
margins).
Employing and understanding proxies and assumptions is at the
heart of good strategic consulting, but at times you may feel that you
have only limited confidence in your estimates. Three points on this:
- do not be afraid to express and discuss this concern.
- use this tool to understanding its impact
- you are not expected to know exact values for uncertain events,
but you are expected to know better than anyone else

81
Shareholder value analysis

Description Shareholder Value Analysis (SVA) demonstrates how decisions affect


the net present value of cash to shareholders. It measures a
company's ability to earn more than its total cost of capital and thus
add value.

In recent years, tools for examining shareholder value have become


widespread. This is because companies and individuals have
increasingly realised that:
- accounting measures can distort economic reality;
- increasingly, analysts focus on cash flow;
- fund managers have used SVA analysis for years; and
- earnings per share (EPS) and other traditional measures tend
to have a lower correlation to share price performance than
SVA measures

Shareholder value can be split into market-based measures (the


ultimate external tests is the success of a company in creating wealth
for its shareholders) and internal measures (which act as proxies for
market based measures).

Shareholder value performance measures

Market based measures Internal measures

Market value added: the monetary Shareholder value analysis (Economic


premium (or discount) of the gross market Value AddedTM): net operating profit after
value of a company to its total invested tax - capital financing charge. Note that
capital base. there are many adjustments required to
Market to book ratio: market value of both these items.
equity divided by the amount of Economic profit: invested capital
shareholders capital invested and multiplied by (return on invested capital -
retained in the company. weighted average cost of capital).
Total shareholder return: dividend yield CFROI (cash flow return on investment):
and capital gain (expressed as %) is the IRR of current cash flows assumed
to continue over the residual life of
assets.
CFROI and TSR concepts can be
combined to measure total business
returns: at business unit level this leads to
TBR = ((MV2 - MV1) + FCF) / MV1

Typical This tool is used at two levels within a company: the operating
application business unit and the corporation as a whole. Within business units,
SVA measures the value the unit has created by analysing cash flows
over time. At the corporate level, SVA provides a framework to
assess options for increasing value to shareholders: the framework
measures trade-offs among reinvesting in existing businesses,
investing in new businesses, and returning cash to stockholders.
82
SVA is used both as a tool to aid in one-time major decisions (such
as acquisitions, large capital investments or division breakup values)
and to guide everyday decision-making throughout the organisation.
When used as an everyday tool by line managers, SVA can be
applied in many ways to:
- Assess the performance of the business or portfolio of
businesses. Since SVA accounts for the cost of capital used
to invest in businesses and the cash flows generated by the
businesses, it provides a clear understanding of value
creation or degradation over time within each business unit.
This information also can be linked to management
compensation plans.
- Test the hypotheses behind business plans. By
understanding the fundamental drivers of value in each
business, management can test assumptions used in the
business plans. This provides a common framework to
discuss the commercial viability of each plan.
- Determine priorities to meet each business's full potential.
This analysis illustrates which options have the greatest
impact on value creation, relative to the investments and risks
associated with each option. With these options clearly
understood and priorities set, management has a foundation
for developing a practical plan to implement change.

Typical Before embarking on shareholder value analysis, bear in mind that it


process requires a thorough understanding of the business in question in
order to determine the amount of investment required and the
expected cash flows that investments will yield in an accurate
manner.

Begin by determining the actual costs of all investments in a given


business, discounted to the present at the appropriate cost of capital
for that business. You will need to agree this rate with the client.

After you have done this, estimate the economic value of your clients
business by discounting the expected cash flows to the present at
the weighted average cost of capital.

The economic value added can then be worked out as the difference
between the net present value of the investments and cash flows.

83
Share momentum charts

Description Share momentum charts are a way of presenting dynamics in market


share amongst competitors operating across different markets.

Typical As a tool, they help you display relative market share performance of
application competitors across a particular market sector, or across sectors for a
particular competitor.

See also: Sector Charts and Growth Share Matrix.

Typical Begin by carefully defining the market or industry you are dealing
process with.

List the competitors you are analyzing, and gather historical data
from general research, company and broker reports for each
component, along with overall data on the markets size and growth.
Ensure the total market data corresponds to the competitors you are
looking at.

Compile competitor sales data for between three and five years
previously.

Create an Excel table with market/industry size at period start and


end, and sizes for each competitor over the same period

Calculate the absolute growth between period end and start, then
divide by the number of years. Plot the results on the chart so that
the market or industry growth is on the horizontal, and competitor
growth on the vertical axis.

Add a share gain line bisecting the two axes.

Players whose bubble appears above the gain line are performing
relatively well, compared to competitors (i.e. they are gaining market
share).

Take care how you interpret the results. It is important to think about
the meaning of the chart and add clear notes to your slide. Is, for
example, a poor position on the chart because of underperformance,
or is a player is choosing to exit the market?

84
Example Share movements by competitor, Music, Cards & Video retail, UK, 1995-1999
output
60%
Competitors
gaining share Blockbuster
50%
Competitor Growth (% over 4 years)

40% Paperchase
WH Smith

30% Disney Store


Disney Store
20% Our Price Boots Woolworths
WH Smith
J. Menzies
Competitors
10% Woolworths
losing share
J. Menzies

0%
-10% 0% 10% 20% 30% 40% 50% 60%
-10% WH Smith
Music Cards Video

Total Market Growth

Source: Example
Tricks Always write the meaning of the bisecting line on the chart:
and tips - Above the line = gaining share
- Below the line = losing share

For multi-segments on one graph, all the bubbles in a given market


should be on the same vertical line - this allows you to look at the
relative performance of different markets as well as players within
them.

The share momentum chart can be very insightful when used in


tandem with the growth share matrix to examine the market.

85
Sources of value waterfall

Description The sources of value waterfall is used to identify and highlight


individual sources of value within a company.

Typical Value waterfalls often add value to the client by presenting data in
application a simplified way. The process forces you to identify key areas of
value creation and/or destruction and thus focus on the big issues
that determine a clients competitive position.

These could include:


- reasons for change in revenue or profitability;
- sources of cost savings;
- sources of capital expenditure spend or savings;
- description of full potential sources of value; and
- aspirational description of what is achievable

Two sources of value waterfalls next to each other can be used to


show comparative performance over time - such as between two
departments, products or competitors.

Typical Begin by obtaining the necessary data from financial statements,


process accounts, or market research. If data is not available, use
estimates or proxy data.

Decide what measure you wish to have on the vertical axis, but
remember that this axis always describes the value being created
or destroyed. This could be any financial or non-financial
measure (such as ROI, capex, working capital, headcount,
number of customers).

Then decide on the elements of the horizontal axis. These


represent the disaggregated categories which are causing the
change. Such categories could also be time or some other
incremental measure.

Ensure you choose the right categories to reflect all sources of


value creation and/or destruction.

Where value is destroyed, stack the boxes in a downwards


direction.

When creating the chart in Excel, you will need to use invisible
boxes to get the output to line up correctly.

Annotate your chart, including explanatory notes, and detail of


key assumptions, outputs and sensitivities.
86
Example
output 100
Cumulative net
contribution to c.12m
Total net contribution
ABCD
(2002-2006) =
2001-2006 (
c.30m c.89 million
million)

50 c.8m

c.10m

c.27m c.2m

Core element of ABCD

Related element of ABCD


Potentially independent of ABCD

0
Connectivity and OMS Smart Trade cost Back-office Corporate
standardisation order analytics outsourcing actions
(Basic ABCD) routing
system

Source: FSI project, May 2001

Tricks Be careful not to overcomplicate the horizontal axis by having too many
and tips categories, or by making the categories too complex. Remember, you
are trying to describe the big issues to senior managers. Leave the
detailed analysis to the appendix.

The sources of value waterfall often provokes many questions. Be


prepared to discuss all the assumptions, inputs and workings of the
model with the client.

Be careful to define your categories so that there is no double counting.

87
Strategy articulation map

Description One of the key challenges in any strategy project is articulating


strategic criteria in a clear and consistent manner. It is
necessarily complex and multi-faceted and cannot be reduced to
a glib phrase or mission statement without exploring what these
criteria mean, in practical terms, for a business.

The strategy articulation map is a tool designed to document and


analyze a companys strategic intent in a structured manner.
However, it can also function as a quick and easy tool to quickly
gather ideas from the client about where the company is and
where they see it going, and demonstrate the linkage between a
companys vision, mission and values.

Typical Ideally, the strategy articulation map is a tool used at the


application beginning of any project.

The strategy articulation map is built in close discussion with


senior management in the client company, and can be a useful
exercise on its own in getting senior staff members to think about
the relationship between the companys stated intent and a
potentially divergent reality before communicating this across to
the company.

Typical In discussion with the project team, formulate a hypothesis to take


process to the key client contacts for discussion.

Once you have done this, arrange interviews with the main senior
members of the client staff. Use these to conduct interviews on the
strategic direction of the company, based around the hypothesis you
have formed, following the logical flow of questions from the top to
the bottom of the pyramid.

Take care to challenge and evaluate the client contacts statements


robustly, especially when they come directly from mission or vision
statements. Bear in mind that competitive advantages are generally
few and far between; whereas competencies may be broader.

Initiatives and competencies usually flow fairly easily from the


statements at the top of the pyramid, although corporate politics
may find you returning to the original statements many times.
Make sure you track agreement and the reasoning behind any
disagreements.

88
The results of your information should be organized in a pyramid
structure. The information should be clear, and organized so as to
prove the conclusions you have reached through the course of the
interview programme.
Example
output To
be a
Vision profitable
manufacturer of
branded, core, low-risk
investment products for
pre-eminent intermediaries
in chosen advice-led retail markets

Leading World- Ability to build History


asset class, and access and
Necessary competitive manager, proven leading pedigree
advantages leveraging research intermediaries which may
economies of and in the retail have the
scale to provide investment market potential to
out-performance to processes, be leveraged in
clients, and share core to intermediary
value with intermediaries differentiate retail markets
d products

Implementing Establishing Winning the Employing best Developing


leading-edge company as top hearts and customer the capability
management 10 UK provider minds of relationship for faultless
information systems of retail intermediaries managers and administration to
Battlegrounds which facilitate investment and end- best managers meet
understanding and products, while customers on of customer intermediaries
management of the retaining the use of the relationship requirements and
drivers of profitability at profitable advanced active management manage the risks to
customer and product levels offshore product as a systems to sell which BGI is
business, rapidly component of a proposition exposed by the new
followed by entry balanced business
into European portfolio
markets
Key Rationalize Focus product Develop high Develop a Design and Develop a Create operational
initiatives product set by development capability quality channel implement brand and infrastructure to
reviewing on controlled product management strategy for sales and marketing support retail
profitability and innovation aimed at information on customer customer strategy to business,
mapping to needs meeting intermediaries customer acquisition service build retail including
of target customer demand for new retail profitability, sales processes and and active automated service
segments products effectiveness, infrastructure reputation offering
etc.

Underway

Source: client project, June 2001

Tricks During interviews, make sure you push to the logical end of any line of
and tips questioning, even if that involves asking hard questions. Not asking
enough is worse than asking too much - provided you are polite and
have a clear and well reasoned logic to your argument.

Always be prepared to defend your assertions to the CEO.

89
SWOT analysis

Description SWOT analysis is a tool for auditing an organisation within the


challenges of its environment.
SWOT is an acronym for Strengths, Weaknesses, Opportunities
and Threats. The tool is a simple aid for structuring thoughts
about a company and the environment in which it operates, and
helps answer questions, such as:
- what strengths does the firm have to build a strategy upon?
- which weaknesses preclude certain strategic moves?
- what are the primary opportunities the firm can pursue?
- which threats need most careful management?
Any good strategy for a company should capture the best growth
opportunities, mitigate against the most significant threats,
leverage the companys strengths, and act to decrease or avoid
their weaknesses.

Typical SWOT analysis is typically used to generate a list of factors


application affecting a companys position within a market or industry. It is a
simple framework to guide more detailed formal analysis.
It is best performed towards the beginning of a project but may
also be useful in client interviews or workshops by letting the
participants brainstorm and priorities within each category. The
key issues identified by the SWOT analysis can feed into a
projects research programme and contribute to a hypothesis tree

Typical Define the market the client company is competing in and list the
process key players in the market.
Gather exiting analyst reports, expert interviews, annual reports,
players analysis, strategic group analysis
Draw out what seems to be the most important themes in the
research you have gathered
Fit each item into the relevant section of the SWOT model and add
any additional conclusions you may have drawn
Try to be MECE. Issues cannot be both opportunities and threats or
strengths and weaknesses.
After completing your SWOT analysis, ask yourself these questions:
- How can the client leverage strengths to capitalize on the
opportunities?
- How can the threats identified be overcome?
- What does the client need to do to overcome its weaknesses?
- How will the client overcome the identified threats?

90
Example SWOT analysis of Chelsea FC, 2000
output Strength Weakness
Skill, knowledge/experience Missing asset needed to compete
Organizational resource or Condition that places a firm at a
competitive capability disadvantage
Market advantage Competitive liabilities or unproven
Competitive assets abilities

Experienced players Little development opportunities

Weaknesses
Strengths

Key real estate location for the youth teams


Cultured football methods Old players more accident
shared across the squad prone
Midfield play Low scoring
Inexperienced manager

Attract further key international Still backed by private investors


Opportunities

names MUFC and Arsenal keep getting

Threats
Umbrella branding bigger
(internationally recognized Leeds, Liverpool, back in
name) contention for N 3 spot

Opportunity: Threats:
External chrematistics that Factors that may undermine
provide potential competitive existing business model HR,
advantage or growth technology, new products,
regulation, politics, demographics
Source: Example

Tricks Brainstorm all possible risk factors before analysing each in more
and tips detail. SWOT analysis can never be complete, apply the 80:20 rule
in deciding where to stop
A word of caution, SWOT analysis can be very subjective. Do not
rely on it too much. Two people rarely come-up with the same final
version of SWOT. So use it as guide and not a prescription. Adding
and weighting criteria to each factor increase validity
Think about the implications of your conclusions carefully: how can
strengths be built into corporate strategy; how can weaknesses be
avoided or minimized; how can opportunities be exploited; how can
threats be prepared for?

91
Traffic light charts

Description Traffic light charts are simple mechanism for capturing and
displaying performance against a number of different criteria.

Frequently used alternative names for traffic light charts are


Harvey ball charts or Moon charts.

They consist of a grid, where performance against key criteria are


demonstrated as high/medium/low - displayed as colors (red,
green, yellow) or shaded as new/half/full moon images.

Overall performance is usually summarized across all criteria, but


other strategic conclusions can be drawn from the clustering of
criteria.
Typical Traffic light charts are a very versatile tool, and can be useful
application wherever a rigorous comparison between market players has to be
made.

They are often used to summaries business opportunities or


competitor behavior.

Typical Do not begin to construct your traffic light chart until you are sure
process that you have agreement on the key criteria under assessment.
Also, be sure to define the criteria very clearly.

Next, set up a template for each criteria which captures the sub-
elements and commentary that will eventually lie behind each
colored circle.

Complete the templates in detail and make sure you have


tracked and logged all of your logic.

Summarize all thinking into the final traffic light chart.

Sanity check the answers coming out: is this sensible overall, not
just as a summation of individual elements.

Look at the shape, shading, and patterns that may lie in the chart.
Use these observations to draw strategic assessments.

92
93
output
Example

s se
ch ha SB h er
S a n /C c PB di
p-S yn e ro r l O
an ga ou l L ch B be rd
m or r ril C s Am s o
d M i tig er B ut N et nt ba
ol C M SB SP e liu ct m
G JP H C D AB Ju Pi Vo Lo

Brand
Financial strength
Scale/distribution capacity

Cross sales leverage


Management capability

Open platform progress


Adoption of technology

Structured product capability


Segment focus
Service capability

European wide intent


European understanding
European market entry - competitor review

Overall

Strong Average Weak

Source: UBS, March 2001


Value chain analysis

Description To understand the dynamics of an industry, it is helpful to analyse


the entire value chain and the positioning and strengths of
competitors within the same context.

The value chain analysis tool shows the level of market


concentration at each stage of the value chain, and the value
companies create within it.

A company may dominate its own market/segment of the industry


value chain but be in a relatively weak position because of players
further up or down the value chain.

Typical Value chain analysis assists understanding of an industrys


application characteristics: the linkages between suppliers and customers,
the share of value generated at each stage in a value chain, as
well as the degree of vertical integration and the structures and
level of company concentration.

Value chain analysis also enables a greater understanding of


monopoly and/or monopsony conditions.

Typical Begin by identifying the key activities in the value chain. To do


this, isolate the end product you are examining, and list the raw
process
materials required to produce this. Then, simply record each of
the intermediate steps required to transform the raw materials into
the final product.

Determine the value added by each step of the chain. This can
be determined by taking the selling price, less retail margin, minus
the input price.

Determine costs and margins within each segment for each


player.

After this, begin to identify the key players at each stage of the
chain. Group together the players that produce equivalent or
substitute products, and determine the concentration of
competitors at each step.

Finally, identify the relationships within or across stages of the


value chain. Analyze specific relationships among players and
assess the degree of vertical integration among players in the
various steps.

94
Completing this process in a structured manner gives you a clear
picture of:
- the linkages between suppliers and customers;
- where the value resides in the value chain;
- the degree of vertical integration in the industry;
- where threats of substitution may lie;
- where barriers to entry and exit are located; and
- the drivers of key costs and profit margins

Example Concentration and vertical integration by value added of players in a value chain
output
Suppliers Manu- Distrib- Wholesalers Retailers
facturers utors
100
Player Player 10
7 Player 10
% share of total value created

Player 12
80 Player Player 11
6 Player 9 Player 9
Player
5
Player 8 Player 8 Player 11
60
Player
3
Player 10
40 Player
2 Player 7 Player 7
Player 10
20 Player
Player 7
1 Player 5
Player 6
Player 4
Player 5 Player 7
0
0 20 40 60 80 100
% share of total value created in Industry

Source: Example

Tricks Analysis of share of value generated is very time consuming and


and tips resource intensive. The tool should only be used where the market
structure is such that it will yield insight. Typically, these will be
industries with high degrees of vertical integration or where competition,
or lack of it, in one segment of the value chain affects preceding or
subsequent segments.

95
Value disciplines

Description The value discipline model helps you position competitors or


industries against one another according to three generic
capabilities: product leadership, operational excellence, and
customer intimacy.
Typical
application Use the value disciplines chart to demonstrate key competitive
differentiators.

It is a tool designed to aid discussion and thought, whether internally


or with the client, rather than in final analysis or in presentations or
packs, and usually works better at a high level than in a data rich
environment.
Typical
process Begin by carefully defining the market or industry you are assessing
and identifying the competitors.

Try to be open and imaginative about potential competitors: think


about companies that address the same audience, or require
consumers to act in a similar way (e.g. bars vs. gyms as places
where only a finite and competitive period of time can be spent).

Gather data on each of your competitors, in both qualitative and


quantitative forms.

Organize your information against the three predefined capabilities: if


your information is quantitative rank against each capability; if
qualitative, rank in discussion with your client.

Plot the resulting data on a chart in Excel according to the rankings


you have identified. You can do this using the Radar function in the
Chart menu.

Always remember that this is an indicative tool, not a proof of a right


answer. However, it can illustrate a point, or highlight a lack of focus
in certain areas.

96
Example Value disciplines, Car industry, UK, 1999
output
Product Leadership

BMW

Rolls

Lada
Vauxhall
Daewoo

Operational Customer
Excellence Intimacy

Source: Example

Tricks One major drawback of the value discipline diagram is that it implies
and tips a counter-relationship between capabilities: if a company performs
particularly well on one axis, it undermines the comparative
performance on others due to the shape of the diagram. Be aware of
this when you are discussing your results with your client.

Make sure you think in advance about the scale you use - these
should be relative and meaningful in application.

Try to shade and annotate the chart to bring out your main
conclusions.

97
Weighted column chart

Description The weighted column chart is a bar chart in which the width of the
columns shows a second dimension. It helps display, for
example, competitor profitability and competitor share.

Typical The weighted column chart has many uses, the most common of
application which is to analyze the profit performance of competitors or book
value and value generated relative to their market share. If the
data is available, the chart can equally be used to examine:
- business units within a company; or
- departments within a particular business unit

Typical Begin by carefully defining the market you are looking at. List the
process competitors to be included in your assessment, and obtain data
reports for each.

The weighted column chart always takes the same format, and
there is an Excel-based tool to automate its creation. Create an
Excel table for last years sales and the profits for the last three
years, and plot the results on the chart. Place the share of
market along the horizontal axis and the return on sales on the
vertical.

Annotate competitors carefully if there is incomplete and/or


misleading data. This might be due to:
- less than three years of financial figures;
- year of sales is not last years;
- data does not compare like with like; or
- figures include activities not directly related to the market
you are looking at

98
Example Industry profitability, Industry X, 1995-98
output 20%
ROS
(last 3 15
years,%)
Industry average = 10.0%
10

5
Comp 1 Comp 2 Etc

0
0 20 40 60 80 100%
-5

-10%

Share of market, by competitor


Source: Example

Tricks Dont forget to average over at least three years of data when
and tips calculating ROS. If your data is incomplete, be aware of what is
missing, but start plotting your information anyway. Partial data is
better than nothing at all.

Dont be afraid to call the competitor directly - after getting clearance


from the manager on your project - to gain an idea of the segment
profitability, but remember client confidentiality issues at all times.

Plot the weighted average industry profitability line based on the


information you have, but indicate what total percentage of industry
sales you have profitability data for.

99